Analyzing Grifols is inherently challenging due to the frequency of significant events impacting its corporate trajectory. Grifols, a leading global manufacturer of plasma-derived therapies, holds a pivotal position in the market for plasma proteins. Notably, it once boasted a market capitalization exceeding €20 billion—comparable to Telefónica—and is deemed in the Iberia peninsula a strategic asset by the United States, alongside the Strait of Gibraltar and the Algeria-Europe gas link. Founded in 1909, Grifols experienced an incredible rise in its stock price, appreciating meteorically from 2006 to 2020. However, it subsequently declined sharply from over €30 to the current €9.50 per share, leaving institutional and retail investors from the 2020-2023 period significantly underwater. In 2024, the company's shares faced further challenges, particularly following a critical report from Gotham City Research released a year ago. The report alleged that Grifols misled investors regarding its earnings and leverage ratios, despite oversight by Spanish regulators, and highlighted potential conflicts of interest involving family members and a satellite company, Scranton Enterprises. Key events of 2024 included the sale of a 20% stake in Shanghai RAAS in June (crucial for reducing debt) and the failed acquisition attempt by Brookfield Capital Partners in November. Brookfield’s bid to take Grifols private, valued the company at €10.5 per share (€6.45 billion total), but the Board rejected it, citing an undervaluation of the company’s fundamentals and long-term potential. This decision aligned with the hopes of many retail investors and funds who opposed the bid. **A careful appraisal** Stock price and credit spreads remain in my view two critical aspects worth studying which extend their importance beyond the regulatory investigations initiated in Spain and the U.S. following the Gotham report, which ultimately remains a subjective interpretation. Notably, the SEC concluded its probe in December, stating it did not "intend to recommend an enforcement action" against the short-seller. Grifols, however, maintains that the "short and distort" strategy significantly harmed its reputation. Meanwhile, Spain’s National Court accepted a complaint from the Anti-Corruption Prosecutor Office against Gotham for allegedly spreading biased and misleading information. The legal mess continues (and I don’t comment any further). Despite improved financial performance in 2024—with stronger revenues, EBITDA, margins, and reduced leverage—Grifols’ stock remains volatile (even intraday) and significantly below the January 2024 levels. Analysts highlight that the company currently trades at a low forward P/E ratio of approximately 10x, markedly below its five-year historical average of over 20x. For comparison, its U.S. peer CSL trades at a P/E multiple of 30x. Similarly, on a 2024 EV/EBITDA basis, Grifols trades below its historical average. This depressed equity level raises questions about valuation, especially considering the stock’s precipitous decline since 2020, with the Gotham report amplifying pre-existing challenges. On the debt side, Grifols has effectively managed its 2025 maturities and bolstered its liquidity profile. The revolving credit facility (RCF) maturity was extended, and all three major rating agencies in December have acknowledged the company’s progress with upgrades and stable or positive outlooks. The next significant maturities occur in November 2027. Grifols demonstrated its ability to attract fixed-income investors with two major bond issuances in 2024—one in April, followed by a €300 million tap in June, and another in December. These bonds underscore continued access to both public and private debt markets, reflecting confidence in the business model and debt coverage. While the company’s cash flow production is not yet positive, it is expected to reach €2 billion over the next three years, consistent with its pre-2020 history (perhaps too optimistic in my opinion). Had the Brookfield acquisition proceeded, it would have required over €11 billion in financing. Market rumors suggested sufficient reverse inquiries and capital readiness to support the transaction. Regarding credit spreads, Grifols’ outstanding senior secured notes (SSNs) and senior unsecured notes (SUNs) offer diverse convexities and returns. If Grifols sustains operational improvements—normalizing plasma volumes and prices, reducing costs, maintaining acquisition discipline—and achieves a leverage ratio below 4.5x (from an unsustainable 9x), the SUNs could benefit from credit upgrades. The 2027 bonds may be too compressed, but I think the other SSNs are fairly priced and are likely to trade in line with the European high-yield single-B credit index. The spread between SSNs and SUNs (it is significantly better than other pharma companies in Europe for what concerns the long maturities) has already tightened in the last 45 days showing that some selected purchases have been executed in December (probably the involvement of the funds I advise). Notably, the Brookfield bid’s collapse did not significantly impact bond prices, reflecting an improved market perception of the Grifols’ scale and leadership in an oligopolistic industry. Conclusions: A notable misalignment persists between Grifols’ equity and bond market valuations. This divergence is not unprecedented. We observed, a similar trend in the European real estate sector during H1 2024, when credit markets recovered faster than REITs equities. Over the coming months, one of these markets for Grifols is likely to converge with the other, similar to how real estate corporates did in 2H 2024.This will depend on which market more quickly and accurately evaluates the underlying strengths, challenges, and valuations. **Possible explanations** Setting aside accounting issues and negative events that could entirely overshadow optimism, the divergence between equity and credit, in my opinion, stems from supply and demand dynamics. The European high-yield credit market experienced in 2024 its strongest inflows in over a decade (making the 2019 numbers look pale in comparison) with cash-rich investors opting to express their confidence through credit rather than equity. At the same time, opportunistic funds with substantial dry powder sought to invest in a global, well-established player with a different geographic location from the usual suspect countries, and a vast footprint and integrated business model. The timing (Q2 2024) was critical, given the closure of public markets for Grifols and the upcoming sale of a 20% stake in Shanghai RAAS. The €1 billion April bond, structured as a private placement, was a strategic move that highlighted investor confidence in Grifols’ financial health and resilience. The transaction ultimately proved beneficial for all parties involved and propped up the entire borrower’ credit curve without particular concerns of temporal subordination risk. As I wrote in January 2024 Grifols needed to start addressing its challenges and doing the necessary groundwork (including reducing the complexity of corporate structure). This happened, and Grifols made significant progress in its KPIs and in managing its €2.2 billion maturity wall for 2025, representing roughly 20% of its total debt. The next hurdle arises in 2027, and it is impossible to estimate the future credit market conditions. Maintaining orderly accounts and contained leverage (inside 4X, a target level missed for seven years) remains the company’s most viable strategy, irrespective of whether it remains publicly or privately held. Two unanswered questions persist for me: First, given that the Gotham report largely relied on publicly available, audited information reviewed by regulators, and known by professionals, why did equity investors remain heavily exposed, only to be shocked in January of twelve months ago, by a stock that was already in a declining trend, having dropped over 50% from its peak? If the report didn’t provide any new insights (this is what has been said by analysts, mainly in Spain), why did the equity drop another 40% in Q1 2024? I suspect some equity investors either did not do a great job before the short seller attack, or they are not speaking the truth after the Gotham report. Second, why did the 2025 bonds fail to attract interest when they were trading in the low 90s? While the 2028 unsecured notes posed greater challenges due to limited visibility on accounts and events, the SSN 2027 bond inexplicably struggled to garner investors interest in the high 80s at end of Q1 2024. The issuance of new senior secured securities maturing in 2030 alleviated much of the uncertainty, providing a degree of reassurance as I wrote above, about the debt's stability and coverage through the robustness of the business model. However, the existing secured bonds were temporarily undervalued from a risk-return standpoint. The subdued interest in the first part of 2024 can likely be attributed to a lack of investor focus and critical analysis (at least in the public market). As of now, it appears the fog surrounding Grifols’ outlook has lifted; the legal actions are unfolding.

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After one Year, no Blood on the Street: Grifols