24/01/2024
Published in
El Confidencial
Germán López Espinosa
Full Professor Accounting Department of the University of Navarra and IESE Business School.
The CNMV has just received the answers from Grifols, S.A. and the market is awaiting explanations regarding, among other things, who the shareholders of Scranton Enterprises B.V. are and whether there are specific agreements with the relevant shareholders of Grifols, S.A. This question is undoubtedly very relevant, but other questions related to the economic background of the transaction that took place in 2018 also remain to be resolved.
For the latter, it is necessary to analyze the facts described in the Annual Accounts of the companies involved. The Consolidated Financial Statements of Grifols, S.A. for that year contain the following information:
- On March 19, 2018, group Grifols reached an agreement with Aton GmbH for the purchase of 100% of the shares of Haema AG ("Haema") for a total amount of €220 million without assumption of debt.
- On August 1, 2018, Grifols, through its subsidiary Grifols Shared Services North America, Inc. purchased 100% of the shares of Biotest US Corporation (subsequently renamed BPC Plasma, Inc.), for a price of $286 million.
- On December 28, 2018, the group Grifols sold the companies Biotest US Corporation and Haema AG to Scranton Enterprises B.V . for $538 million (€470 million).
- For the payment of the aforementioned sale proceeds, Scranton entered into a loan agreementdated December 28, 2018 in the amount of $95 million (€83 million) with Grifols Worldwide Operations Limited. The remuneration is 2%+Euribor and matures on December 28, 2025.
- Appendix I to the Consolidated Financial Statements of Grifols, S.A. states that Grifols Worldwide Operations Limited is a company wholly owned by Grifols, S.A. and domiciled in Ireland.
- Pursuant to the provisions of article 357 of the Irish Companies Act 2014, Grifols, S.A. irrevocably guaranteed all liabilities of the subsidiary Grifols Worldwide Operations Limited (Ireland). From agreement to Section 1(b) of said Act, the company Grifols Worldwide Operations Limited is entitled to apply for the exemption of the obligation to deposit its financial statements in Ireland in relation to the year ended December 31, 2018.
- The sale agreement includes a call option for Grifols, S.A. which grants it the irrevocable and exclusive right (not an obligation) to acquire the shares sold to Scranton (both at the same time) at any time after the effective date of sale. The price to exercise the call option will be equal to the higher of: (a) the price at which Grifols sold them plus transaction costs and plus the increase in working capital and (b) the amount of the debt held by Scranton at the date on which Grifols exercises the option (principal plus interest plus any other costs to repay such debt loan). Considering that the projections for the entities are for growth and an improvement in their results is expected, it is concluded that this option is "in the money" as the market price of the entities is estimated to be higher than that agreed in the option.
Before analyzing the accounting rule (IFRS 10) relating to whether Grifols, S.A. retains control of the companies legally transferred, the economic background of the transaction must be analyzed. In this respect, the question arises as to which third party business would be willing to buy two companies which, at the seller's will, would have to be sold again without any possibility of gain, since either the price plus the costs incurred and the increase in working capital or the outstanding debt used to finance the acquisition plus interest would be paid to the seller. From an economic point of view, no third party outside group Grifols would accept such conditions, since it assumes a risk and limits its profits, so first of all we have to deduce that group Grifols should not give leave these two companies and its consolidated statements must include all the assets and debts of these companies and the EBITDA of these companies must be part of the consolidated EBITDA of group. Curiously, from an economic point of view, the transfer occurs when the market value of both companies is lower than the exercise price of the option, but not before. In addition, it is also unreasonable for group Grifols to sell these two companies and assume the risk of credit with the buyer for 83 million euros, given that a subsidiary of Grifols, S.A. grants a loan to the buyer for this amount.
On the other hand, in the individual financial statements for 2018 of Grifols, S.A. audited by KPMG, Haema and Biotest US do appear. However, in the individual annual accounts for the 2021 financial year, when they were audited by Deloitte, no information on these companies appears. Neither do they appear in the individual Annual Accounts for the 2022 financial year. The individual financial statements should state that Grifols, S.A. has control of both companies.
On the other hand, in the 2018 Annual Accounts of Scranton Enterprises, B.V. it is reported that the purchase was actually made by Scranton Plasma, B.V. and of the €470 million that was the transaction price, Bank of America granted a senior secured loan in the amount of €315 million to finance the transaction. Also reported is the loan received by Scranton Enterprises, B.V. in the amount of 83 million euros from Grifols Worldwide Operations Limited. A cash balance of Euros 34.3 million is reported in the consolidated balance sheet and cash flow statement of Scranton Enterprises, B.V. status .
Scranton Plasma, B.V.'s 2018 Annual Financial Statements report that business commenced operations on November 9, 2018, 49 days before the acquisition of Haema and Biotest US. The balance sheet of status dated December 31, 2018, three days after the transaction, shows a debt in the amount of €306 million and equity in the amount of €166 million, i.e. the partners' contribution had a book value of €166 million and, the outstanding amount of the debt, to Bank of America, amounted to €306 million. On the asset side, the company had the investment in both companies amounting to EUR 470 million and current assets amounting to EUR 2 million. It can be deduced that Bank of America requested that the partners contributed 35% of the transaction price to the vehicle used, Scranton Plasma, B.V. and the remainder was a senior secured loan whose collateral cannot be deduced from the information in the financial statements.
In addition to the above, it should be added that the relevant fact of January 9, 2024 made by Grifols, S.A. stated the following:
The financial institution used by Scranton to finance the transaction imposed as a condition to Scranton to support the transaction the subscription of a "Vendor's Financing", loan from Grifols to Scranton. Although Scranton had sufficient cash and did not need this loan, the financial entity believed it was necessary to involve Grifols in the transaction.
Taking into account that the loan granted by Grifols Worldwide Operations Limited was in the amount of €83 million and that the liquidity of Scranton Enterprises, B.V. amounted to €34.3 million as of December 31, 2018 it does not seem accurate to say that Scranton had sufficient cash not to resort to loan of the Irish company of group Grifols.
One of the most awaited answers is to know who are the real shareholders of Scranton Enterprises, B.V. In the last Annual Accounts of this company, fiscal year 2021, it can be seen that it has been authorized to issue 30,000 shares but in reality only 5,799 fully paid-up shares have been issued. It has a share capital of 579,900 euros, which corresponds to 5,799 shares. In the Annual Accounts of Padolç, S.L. it appears that this company is a shareholder of Scranton Enterprises B.V. holding 414 shares which represent 7.14% (414/5,799) of the shares of Scranton Enterprises, B.V.
The share capital of Grifols, S.A. consists of 426,129,798 voting shares and 261,425,110 non-voting shares.
The share capital of Grifols, S.A. consists of 426,129,798 voting shares (class A) and 261,425,110 non-voting shares (class B). The Annual Accounts of Grifols, S.A. published in the SEC show that Deria, S.A. is the largest shareholder of Grifols with a total of 39,183,692 voting shares of this company, which represents 9.195% of the shares class A of Grifols. Scranton Enterprises, B.V. holds 35,812,622 shares, representing 8.404% of Grifols' voting shares.
In addition, in the Annual Accounts of Scranton Enterprises, B.V. it appears that Deria, S.A. has loaned 10,250,000 shares class A of Grifols, S.A. to this company and in the Annual Accounts of Deria, S.A. for the year 2022 it appears that this company has granted a real right of pledge in favor of Banco Santander over a total of 25.000,000 shares class A of the company Grifols, S.A. as a guarantee commitment for the operation of loan granted by said entity from credit to the company Quadriga Real Estate, S.L. on October 14, 2022 for an amount of 250,000,000 euros . It should be borne in mind that, according to the latest Annual Accounts deposited, Scranton Enterprises, B.V. holds 100% of the company Quadriga Real Estate, S.L. All of the above shows the existing link between the shareholders of Grifols, S.A. and Scranton Enterprises, B.V. It should be borne in mind that with the loan of 10.250,000 shares of class A, Scranton Enterprises, B.V. becomes the shareholder with the most voting rights and, from an economic point of view, the pledge granted by Deria, S.A. to Banco Santander cannot be understood if there are no agreements between Grifols, S.A. and Scranton Enterprises, B.V. shareholders.
Finally, Grifols, S.A. irrevocably guarantees all the liabilities of the subsidiary Grifols Worldwide Operations Limited (Ireland), and the bonds issued by Grifols, S.A. are guaranteed, on a senior secured basis, by subsidiaries of Grifols, S. A., including Grifols Worldwide Operations Limited, i.e., Grifols, S.A. guarantees all the debts of its Irish subsidiary, and the Irish subsidiary, together with other subsidiaries, guarantees the bonds issued by Grifols, S.A. on a senior secured basis.A., including Grifols Worldwide Operations Limited, i.e. Grifols, S.A. guarantees all the debts of its Irish subsidiary, and the Irish subsidiary guarantees, together with other subsidiaries, the bonds issued by the parent company, Grifols, S.A. This status increases the vulnerability of group Grifols.
Notwithstanding the above, it should be noted that Grifols is a leading global healthcare company that develops plasma-derived medicines and other innovative biotechnology solutions of undoubted value. Therefore, it must clearly explain the exact impact that, at the present time, would generate in its accountsand in particular on the debt of group Grifols, the full consolidation of Haema and BPC Plasma (formerly Biotest US), the amount of debt to be repaid by Haema and BPC Plasma, the amount of debt to be repaid by Grifols and the amount of debt to be repaid by BPC Plasma. GrifolsS.A. irrevocably guarantees all the liabilities of the subsidiary company Grifols Worldwide Operations Limited (Ireland), the amount of the bonds issued by Grifols, S.A. guaranteed by Grifols Worldwide Operations Limited, which is the guarantee that Scranton Plasma, B.V. has granted to Bank of America for the loan of 315 million eurosFinally, it is true that the EBITDA of both companies should form part of the EBITDA of group Grifols since, in economic terms, the two companies have not been transferred.