The Grifols case, that is, the devastating effect of the report by the British firm Gotham City, supposedly uncovering accounting makeup in the accounts of the Catalan family company, cannot be understood without two key words: tunnel transactions. These two words, which appear in the Gotham report, actually refer to operations linked to the sale by Grifols to Scranton, a holding company that supposedly belongs to the Grifols family itself, of two companies: Biotest (also known as BPC Plasma) and Haema. According to the report, Grifols uses this operation to cover its accounts, increasing profits and reducing its debt, which is why it concludes that its shares should be worth zero.
What is a tunnel transaction
Gotham defines it as “the transfer of assets and profits outside companies for the benefit of those who control them”. In this case, it points to the fact that the shareholders or management of the first company (Grifols, in this case) are usually absolute owners of the second company (Scranton) and, therefore, benefit from transactions that, otherwise, They would be “disastrous.” It is worth remembering that, although Grifols sold the Biotest and Haema companies to Scranton, it continued to consolidate both in its accounts, arguing that it has a purchase option.
How Grifols has supposedly benefited
By consolidating Biotest and Haema, the supposed benefit of the operation for Grifols would have been that it would have been able to ‘reduce’ its debt by “at least 920 million”, while increasing its 2022 profits by 82 million. By taking both factors into account, Gotham concludes that Grifols’ leverage (debt) is not equivalent to 6 times Ebitda, as the company claims, but “is closer to 10 or 13 times.” Hence his devastating impression of the Catalan Ibex company and his statement that the shares should be worth zero. The market, in fact, has reacted, causing a real drain on the stock market. The shares, which before the report were worth more than 14 euros, are now trading below 9. The company is seeing about 4 billion euros of its capitalization become volatile.
What is the CNMV investigating?
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At the beginning of the case, the focus was placed, pointed out by the Gotham report, on the fact that the problem was that Grifols consolidated Biotest and Haema in its accounts despite the fact that it did not directly have any presence in the capital. The company justified this accounting adjustment by explaining that both companies were part of Scranton, linked to Grifols, and also because it has a purchase option on them. But the situation quickly took a turn when it was learned that The Securities Market Commission (CNMV), the markets regulator, put more focus on who appears in Scranton than in the possible accounting discrepancies that may exist within the scope of the consolidation. The CNMV, in fact, has sent Grifols a request giving it a period of 10 days to detail one by one the shareholders and investors of Scranton, which include family members, former executives of the company and current executives.
What does the CNMV requirement imply?
It fundamentally implies that the irregularities, if they are proven to exist, would not simply be accounting discrepancies, but rather a case that could have legal consequences of different considerations: from sanctions to fines, although there are those who do not rule out that they also go through the criminal sphere. The key would be that a company (supposedly Grifols) would have used a holding company (supposedly Scranton) to manipulate the stock market.