Share Class Arb With A Catalyst – 21% Upside
This pitch was shared by Dan.
Brief note from SSI: This is an interesting arbitrage opportunity between two classes of economically equivalent stock. Over the years, many similar setups have been covered on SSI (VWAPY, 690.D, CUK, BMW.D etc.). The main drawback of such arbs is lack of clear catalyst that could narrow/eliminate the discount between the two share classes. This means one could get “stuck” holding these arbs for a long time. Until recently, Grifols was a similar spread-with-no-catalyst-example (it was previously covered on SSI back in 2020). That has changed three days ago, when the company announced it could be taken private soon. Acquisition/privatization would be the ultimate catalyst to close the gap between the two share classes.
The setup
Grifols operates in the industry of blood plasma based medical therapies and products. The company has two classes of common stock:
- Class A – the voting stock, 36% of which is controlled by the founding family. Class A shares are listed on Madrid Stock Exchange under the ticker GRF:MC.
- Class B – the non-voting stock, which is otherwise economically equivalent to Class A. Class B shares are listed on Nasdaq under the ticker GFRS and Madrid’s exchange under the ticker GRF-P:MC.
Historically, Class B shares have traded at around 30% discount to class A shares:
On July 8, Grifols announced that the founding family and PE giant Brookfield are mulling privatization of the company and have asked management for access to due diligence. Brookfield has confirmed the approach. Reuters’ source noted that discussions between the founding family and the PE firm began over a year ago. The fact that negotiations have continued and advanced to this level suggests that Brookfield is serious about this deal. Certain recent events indicate that privatization path would make a lot of sense for the founding family and would be coming at an opportunistic timing.
Certain Spanish media outlets are speculating that the offer will come at no less than €10/share (e.g. here), while others are saying it will range between €12-€13/share (e.g. here). Grifols Class A stock is now trading at €10/share and Class B – at €8.3/share.
This setup could be approached with a straightforward long on GFRS (Class B). However, the company’s size, business complexity, and murky history are not exactly within my comfort zone. Instead, I have structured this as a share class arbitrage (long GFRS, short GRF:MC). This approach mitigates all business-related risks and strongly protects the downside. Both stocks are very liquid and plenty of cheap borrow is available.
Upon acquisition the gap between the shares would be eliminated resulting in 21% return. If the takeover doesn’t happen, I assume the discount would return to pre-announcement levels, implying 11% downside. This appears to be a very asymmetric opportunity that should play out within 1 to 2 months.
Quick background and why the privatization makes sense
Grifols business is fully focused on blood plasma. The company collects, fractionates and purifies blood plasma and also creates, commercializes biological therapies based on plasma derived proteins. These treatments target acute, chronic, and life-threatening diseases, including immunological deficiencies, hemophilia, and other conditions. Additionally, Grifols supplies plasma-based biological materials to third-party laboratories for life-science research, clinical trials, and other purposes. The company operates in an oligopolistic market, where it is the third largest player, after CSL and Takeda. The market is highly regulated and has significant barriers to entry. More background on the business can be found in this VIC write-up.
The last 5 years have been very turbulent for Grifols, as reflected in the 65% share price decline since 2019. The business was hit hard by COVID-19, which disrupted plasma collection operations. Already carrying significant debt, the company completed a large acquisition in 2022, further straining the balance sheet and pushing net leverage into high single digits. This combination of extreme debt load, suppressed free cash flow (also partly due to ongoing growth capex), and looming $2.3bn maturities in 2025 has significantly contributed to the steady decline in the share price. Being a family controlled stock with poor investor communications, aggressive financial reporting (five different EBITDA metrics) and some strange related party transactions, didn’t help either.
While the looming debt maturities have been addressed this year with a substantial $1.8bn asset sale, the company’s shares were hit by another setback. In January, Grifols was targeted by a short seller Gotham City, which has already released 4 reports on the company YTD. This had a massive impact on the stock, which at peak of the impact in March, was down by over 50%. The reports accused Grifols of financial manipulation, overstating earnings through aggressive non-controlling interest accounting and understating debt to reduce perceived leverage and financing costs. For instance, Grifols continued consolidating Haema and BPC Plasma, two subsidiaries that had been previously sold to a founding family affiliate and in which GFRS no longer held any ownership in.
All of this quickly attracted scrutiny from Spanish regulators, which investigated Grifols accounts and, importantly, “found no significant errors” and “no evidence that the financial debt reported by Grifols does not correspond to reality”. Regarding the above mentioned example: the consolidation of the two subsidiaries, accounting regulations allowed it because Grifols had an option to buy back the subsidiaries. This pointed to some clever scheming and/or poor governance rather than outright fraud. Another issue identified by the regulators was the lack of detail and accuracy in presenting EBITDA and leverage breakdowns.
Although regulators approved the accounts, reputations of the company and the founding family were significantly damaged, and the share price saw only marginal recovery. Short sell attacks, in general, are very uncommon in Spain. Consequently, the founding family members stepped down from senior executive positions and, for the first time in four generations, hired an outside CEO.
Taking the company private with a premier firm like Brookfield would be a major face-saving move for the family, and would allow to escape any further public scrutiny. The timing is also opportunistic, as the stock continues to hover at lows while the company is expected to see an inflection in free cash flow (FCF) next year, once the current elevated one-off costs taper off. Grifols has guided to breakeven FCF this year, largely due to significant one-off growth capex (€370m for 28 new plasma centers and construction of plasma infrastructure in Egypt and Canada) and €110m in restructuring expenses. Next year, the company could be generating over €500m in FCF, more or less in line with pre-COVID levels. Additionally, 3 drugs that GRFS acquired in that large M&A in 2022 are approaching commercialization. Yimmugo has been recently approved by the FDA and is expected to launch in Q1 2025, with management projecting US$1bn in sales during the next seven years. Fibrinogen, which targets $800m TAM, is expected to receive FDA approval next year. Trimodulin is currently undergoing phase 3 trials and is targeting $1bn TAM.
At €12/share, buyers would be taking Grifols private at 10x NTM adj. EBITDA, while its peer CSL (which is much larger, diversified and has much lower leverage) trades at 21x NTM adj. EBITDA. The valuation gap between the firms is now also the largest it has been in years.
The privatization clearly makes sense both from the face-saving perspective for the founding family and from the opportunistic timing angle.
Odds and ends
This Bloomberg article suggested that “by acquiring Grifols, Brookfield would add to private equity’s growing interest in blood plasma products in recent years”. However, I wasn’t able to find any other precedents where this PE firm invested in other blood plasma assets.
Class B shares were created in 2011 as part of Grifols’ multi-billion acquisition of the US peer Talecris. Here’s the merger proxy with detailed info on the Class B terms. It is a pretty interesting security. Grifols calls it “non-voting stock” and only in one place of the annual report it is clarified that the security is actually classified as common stock. In case of a takeover/privatization, both share classes would receive equal treatment. From the annual report:
Each Class B share entitles the holder to its redemption under certain circumstances, if a takeover bid for all or part of the shares in the Company has been made, except if holders of Class B shares have been entitled to participate in the bid on the same terms as holders of Class A shares.
GRFS is a pretty large company with €7bn market capitalization and €16bn EV. So I do not think I have any specific edge on this trade – the arb community might already be accurately pricing both the long-only privatization play and the share class arbitrage. Assuming a €12/share takeover price, the implied chance of success for both strategies (and also GFRS bonds) appears similar. Still, the share class arbitrage is the safest way to play this speculative situation and offers the best downside protection.
Is there any liquidation preference between share classes
In the liquidation scenario, Class B shares have a preference over Class A, but I don’t think that’s relevant to the current situation. From the annual report:
“Liquidation Rights
Each Class B share entitles its holder to receive, upon our winding-up and liquidation, an amount equal to the sum of (i) the nominal value of such Class B share and (ii) the share premium paid up for such Class B share when it was subscribed for.
We will pay the liquidation amount to the holders of our Class B shares before any amount on account of liquidation is paid to the holders of our Class A shares.
Each of our Class B shares entitles its holder to receive, in addition to the liquidation preference amount, the same liquidation amount paid for a Class A share.”
Important to remember KKR tried a similar approach re privatisation in 2019 and it didn’t pan out. Would be good to hear from the community on why this failed.
Could you provide more details? The only related information I’ve found is a Spanish article from 2022 stating that KKR considered injecting capital into GRFS if the company was open to it. Thank you.
https://cincodias.elpais.com/cincodias/2022/06/29/companias/1656528083_794971.html#
Great write up and research, thank you.
I have noticed quite a few instances of Spanish companies having a whole host of related party transactions. As a nation, they are pretty far down the Corruption Perceptions Index (36) as far ‘developed nations go’.
Does the founding family intend to continue to hold their stake, or are they (potentially) selling out too? Based on the write up it sounds like they couldn’t care less at what price their shareholders get cashed out at, as long as they can hold their shares at a ~10 year low and profit from an assumed recovery.
Thank you. My understanding is that the founding family and Brookfield operate as a single group of interested buyers. This would essentially be a privatization financed by Brookfield.
I agree Grifols family is not the most trustworthy party you could have, but they need this face-saving moment right now and the takeover would also need shareholder approval. So, I don’t think they would lowball the deal too much. The share class arb eliminates to lowballed offer risk anyways.
Prior PE interest in plasma:
-Permira buying Kedrion and BPL
-Cerberus buying Talecris
-Creat acquiring Biotest
Do you have an idea what prevents the Family/Brookfield from offering 2 different prices depending on the share class?
Let’s say they offer 12 EUR for GRF and 8 EUR for GRF-P. Can they do that?
Nope. It must be the same price for both classes.
There is some ambiguity in the text. They could offer different terms to holders of B shares, and in that case Class A holder can redeem their shares.
The catch could be: can the redemption term be so unfavorable that it’s more like a nominal amount (e.g. paid up capital on the book or some sort of liquidation preference value)?
Or can class B be redeemed for class A shares in a takeover scenario?
“Each Class B share entitles the holder to its redemption under certain circumstances, if a takeover bid for all or part of the shares in the Company has been made, except if holders of Class B shares have been entitled to participate in the bid on the same terms as holders of Class A shares.
The redemption terms and conditions reflected in the Company’s by-laws limit the amount that may be redeemed, requiring that sufficient distributable reserves be available, and limit the percentage of shares to be redeemed in line with the ordinary shares to which the bid is addressed.”
Snowball,
From the 2010 merger agreement:
The redemption price to be paid by Grifols for each Grifols non-voting share for which the redemption right has been exercised will be the sum of (i) the amount in euros of the highest consideration paid in the tender offer triggering the redemption right plus (ii) interest on the amount referred to in (i), from the date such tender offer is first settled until the date of full payment of the redemption price, at a rate equal to 1-year Euribor plus 300 basis points. For the purposes of this calculation, the amount in euros corresponding to any non-cash consideration paid in the tender offer will be the market value of such non-cash consideration as of the date the tender offer is first settled. The calculation of such market value shall be supported by at least two independent experts designated by Grifols from auditing firms of international repute
Although this only mentions tenders, not mergers or other business combinations, my non-legal opinion is that because it is not a defined term it’s fair to interpret the redemption terms as applying to any type of offer regardless of what it is called.
Tom
Looks like class B can vote as a separate class in a take private scenario. However, only a simple majority is required for approval.
“the Grifols non-voting shares would have mandatory redemption rights or be entitled to vote as a separate class in circumstances involving a potential change of control if the Grifols non-voting shares would not otherwise be accorded equal treatment with the Grifols ordinary shares.”
From the current Articles of Association (and the merger agreement) it seems that in any Redemption Event both Class A and Class B shares would receive the same price/economic value (voting, quorum etc. might be slightly different):
Article 6 Bis. – Terms and conditions of the Class B Shares
Each Class B Share shall be treated in all respects, in spite of having a lower nominal value (NOTE: 0,05€ vs 0,25€), as identical to one Class A Share, and Class B Shares shall not be subject to discriminatory treatment regarding Class A Shares, although, as an exception to the foregoing, the Class B Shares (i) are not entitled to voting rights; and (ii) they have the right to preferred dividend, preference liquidation share and the remaining rights set forth herein.
..
4.3 (C)
Price: The redemption price to be paid by the Company for each Class B Share for which the redemption right has been exercised shall be the equivalent to the sum of (i) the amount in euros of the *highest consideration paid in the offer causing the Redemption Event* and (ii) the interests on the amount referred to in (i), as from the date the offer causing the Redemption Event is first settled and until the date of full payment of the redemption price, at a rate equal to one-year Euribor plus 300 basis points. For the purposes of the previous paragraph, the amount in euros corresponding to any non-cash consideration paid in the offer causing the Redemption Event shall be the market value of such non-cash consideration as at the date the offer causing the Redemption Event is first settled. The computation of such market value shall be supported by at least two independent experts from auditing firms of international repute designated by the Company
So for this specific company and this specific case I think the same price must be paid for both classes of shares and the Estatuto covers mergers, split-offs, cross-border redom etc. as well in article
6.2 (C):
Any resolution approving unconditionally or not (i) a transaction subject to Law 3/2009 (including, without limitation, a merger, split-off, cross-border redomiciliation or global assignment of assets and liabilities), except if in such transaction each Class B Share is treated, in all respects, in an equal manner as one Class A Share; or (ii) the dissolution or winding-up of the Company, except where the resolution is mandatory by law;
Source:
https://www.grifols.com/documents/6155530/6156485/Grifols-+Estatutos-Sociales-EN.pdf/2b8fbaf1-f71f-ad33-ffa9-028cb67260bd?t=1718279542281
https://www.moroders.com/wp-content/uploads/2024/07/Grifols-Estatutos-Sociales-EN-20240716.pdf (a copy of the current version)
No legal advice, DYODD
I think the read is pretty clear that they have to offer the same price as Class A shares unless they tender for Class B shares separately, and the majority of Class B shares votes on something else.
Why wouldn’t a potential acquirer tender for Class B separately and try to get them to accept a lower price than Class A? Nowhere does it say that they have to offer the same price as Class A shares if Class B shares get to vote separately.
Some context re Brookfield:
(1) They had a final close on their latest vintage of traditional corporate private equity program (BCP VI) in October 2023, raising $12 billion, with about $4 billion already invested/committed at the time.
As far as I know, they started investing out of BCP VI in 2022Q2, completing half a dozen large transactions within half a year, and haven’t done any large transactions after 2022Q3. The $4 billion spent as of 2023/10 was mostly attributed to that half year of spending spree back in 2022.
So, they are probably eager to do a larger deal, after a nearly 2 year vacuum.
(2) Healthcare and Software are two areas where they’ve repeated said they are very eager to expand. Not the leading edge type of healthcare/tech, but something more mature and producing utility-like recurring FCF.
Examples include CDK Global (car dealer software; yes, the one that was recently ransomed by hackers), Healthscope (Australian hospital), Everrise (India-based BPO), Nielsen (media rating), Magnati (middle east payment processor) , Scientific Games (lottery service provider) .
So Grifols looks like a business that fit their bill: healthcare and utility-like.
(3) Brookfield’s corporate PE program was very small ten years ago (Brookfield started in real estate/infrastructure), with only half a dozen people in NY Office running a $1 billion fund, investing in mid-market deals. Now it’s in the big boys’ league, but more a new comer, eager to prove himself.
Earlier vintages have produced attractive IRRs (+25% gross), but one of the concerns (for prospective LPs) is that these results are based on smaller funds/deals and now they are raising much larger funds and have pivoted to mega-size deals in recent years.
So they are very eager to prove that they can handle large/complex deals (and have clean exits in such deals too).
If they were to acquire Grifols, they would have to bring in a lot of co-investing capital. Media report says Brookfield plans to repay some Grifols debts, in additional to buying out non-family shareholders, so the total equity check is quite large relative to the size of BCP VI.
And they would probably have to have confidence in a clear path toward monetization, e.g. IPO outside Spain to achieve better valuation. Due to its short history of playing in the large cap space, Brookfield’s PE program has lacked examples of clean exits of $10 billion size companies and is sometimes criticized by LPs for holding onto portfolio companies for too long, so they need successful examples of large exits .
So I would say, although Brookfield is eager, it’s also more constrained. It may not move as fast (needing to line up significant co-investing equity), and may not bid as high (needing to build a larger margin of safety in valuation, for exits in 3-5 years).
Grifols has formed a special committee to oversee a potential transaction involving family shareholders and Brookfield, and has hired an advisor. Brookfield has been granted access to conduct due diligence.
https://www.bamsec.com/filing/110465924079528?cik=1438569
Unfortunate that in the midst of this Grifols needs to appoint a new lead independent director.
GRFS has seen some selling pressure over the last few days, likely due to these two developments:
– Resignation of two directors, including the Lead Independent Director. It’s quite unusual for directors to resign at the beginning of the sale process rather than at the end. This suggests potential conflicts within the board. Maybe the family is pushing the board to accept a lowballed offer?
– Moody’s stopped covering Grifols due to “insufficient or inadequate” information available. While this might sound concerning and might have unsettled the market a bit, it seems the move was simply due to the expiration of their contract with Moody’s. According to Spanish media (translated with Google):
“However, sources close to the Catalan company have explained to Europa Press that Moody’s is no longer covering them because their contract has been terminated, although they will continue to work with the agencies Standard & Poor’s (S&P) and Fitch. These sources have also alleged that Moody’s is withdrawing the ratings because, once the contract has been terminated, it will only be able to access the company’s publicly available information .”
The Class B discount to Class A is now at 19%.
https://www.plantadoce.com/empresa/grifols-cae-un-2-en-el-ibex-35-y-un-5-en-el-continuo-tras-moodys-que-deja-de-cubrirle
Is Yahoo finance right – Euro 9.14 vs $8.11 GRFS now, so spread tightened 5-6%?
GRFS is 8.11$, around 7.36€. From there to 9.14€ It makes around 25% spread
The risk/reward has become very asymmetrical.
Potential upside (complete convergence) is >30%,
and potential downside (return to 30% average discount) is <10%.
After the new info that Brookfield is seeking for finance, the A/B spread remains very wide and risk-reward of a paired trade very asymmetrical.
Wondering what we may have missed regarding the rights of class-b shares.
I don’t have a BBG, but hearing a report that Brookfield found accounting issues. Perhaps someone can check & share / debunk. Tks
The story is not sourced on Bloomberg. It is sourced from OK Diario which is a far from reputable source of news…it is more like a very right-wing tabloid… doesn’t mean it is certainly false, but it has a history of publishing unverified and misleading information.
Understood. Thanks for clarifying. Didn’t want to cause panic which is why I added the caveat. Thanks
And there is the jump. GRF is up 10% overnight on the Nasdaq as Brookfield confirms it seeks 10B in debt for the deal
https://finance.yahoo.com/news/brookfield-seeks-close-10-billion-074737515.html?
Nice move in the spread today on no further news that I can see, now trading at lows
Rumors are circulating that Brookfield Asset Management is in talks with two sovereign wealth funds, Abu Dhabi’s ADQ and Singapore’s GIC, along with other potential investors, to take Spanish healthcare company Grifols private. https://seekingalpha.com/news/4145225-brookfield-in-talks-with-sovereign-funds-over-grifols-bid-report
While no agreements have been finalized, Brookfield is supposedly collaborating with the Grifols family on the potential deal, which could value Grifols at around $8.9bn. Brookfield has also been preparing debt financing to support the take-private bid. 10% spread still there.
B shares continue to trade at 16% discount to A shares.
1) Brookfield getting financing into place and
2) Brookfield stalking other investors to participate
Isn’t that an (almost) sure sign that there will be a bid? If so, why not buy Grifols B shares unhedged?
If Brookfield bids 12-13 EUR you are certainly losing 2-3 EUR on the “short leg”.
I fully sympathize with the idea to hedge out business risk of such a murky company, but if the bid fails you lose the entire upside if the discount goes back to 30%.
Do not underestimate the idiots that are currently in the spanish government. They have just cancelled an acquisition over a spanish company: talgo…
As the family is rolling over their equity, the prob is high that Brookfield/family may make a lowball bid (e.g. 10-11 euro/share).
In that scenario a hedged trade is the most appropriate.
What speaks against a lowball offer is that you do not have to pay a premium on debt, just the equity.
2/3 of Grifols Enterprise Value is debt. (Mcap: 6.5bn EUR, Net Debt: 11.9bn).
Hence, 10% additional premium to equity holders only makes the whole deal 3% more expensive. Or views differently, a low ball offer does not make the whole deal much cheaper.
@Marko,
I am playing devil’s advocate here:
The consortium actually has to “pay” a premium on the debts too.
Because of the change of control trigger, they have to redeem most of the bond/loans at par and re-issue new debts at market rates (much higher interest rates than what the existing debts are paying).
Before the takeover rumors, GRFS bonds were trading at around 80 cents, so you can argue they will effectively pay a 25% premium for the debts, to retire them at par.
Note also that, unlike other LBOs where sponsors can put on more debt/leverage to lower the equity check and juice the returns, in this case the consortium actually has to inject some additional equity when refinancing the debts, because of the very high leverage already in place.
Hi snowball,
All fair points. Thanks for raising them.
A hedged trade has one additional advantage: it’s self-financed (long is financed by short) and requires no cash outlay.
The saved cash can generate decent interest incomes and adds to profit.
Multiple Spanish and foreign institutional investment funds holding a stake in Spanish healthcare company Grifols have hired law firm Araoz & Rueda to defend their interests in the potential joint takeover bid for the company by Canadian investor Brookfield and the founding family of the Catalan group, Expansion reported.
These measures have been taken to ensure that the price of the potential transaction includes a high premium over the company’s current share price, demanding more than €15 per share, with legal counsel needed to defend their interests depending on the decisions taken by the company’s board of directors and the national securities market commission, or CNMV.
The investors have contracted this advice separately and are not acting in concert, Expansion reported, citing sources.
Don’t you find it strange that these rumors say “investors have contracted this advice separately and are not acting in concert”, however a specific law firm is mentioned?
What are the chances of ‘multiple Spanish and foreign institutional investment funds’, which are not acting in concert, hiring the same law firm?
And this law firm seems to be second-tier in Spain, far from the largest players.
Could this be just a PR by the mentioned law firm?
I think it is reasonable that the investors can only hire a 2nd tier firm. The 1st tier firms want to retain their business with Grifols/Brookfield.
That is also the reason why Elliott only works with 2nd tier law firms for their activist campaigns. The 1st ones want to retain their business with corporates and not go against them.
I am not sure how much a law firm can do to help them “demand” a higher bid price.
It all comes down to the votes. If the consortium can get enough votes, they can move forward and close the deal.
What the law firm can do, is help them analyze the corporate documents (articles of association, etc) , to better understand the approval thresholds, rights of class b shares, etc.
I believe Spain allows for appraisal rights, so dissenters can challenge sale price.
It looks like Brookfield is trying to make the offer conditional of paying a discount for the B share holders.
https://www.expansion.com/empresas/industria/2024/09/05/66d8c5e9468aebec738b4575.html
I have no clue if they can get away with it.
Yes, they are asking for a change of the Estatuto to be able to pay a lower price for B shares. This needs the approval of the majority of B shareholders, let’s see what Brookfield offers.. will have to ask a Spanish lawyer/expert to find out if only disinterested B shareholders are entitled to vote. How many B-shares does the family & friends control?
The family members (and affiliated holding companies) own only A-shares.
@snowball: As B share have no voting rights there is no requirement to file public reports with the Spanish National Securities Market Commission (CNMV). Are you sure that family members own only A-shares?
Hi @incubatec,
I counted their disclosed A-shares ownership (listed below) and the sum (30.9%) seems to already matched what they stated publicly about their total ownership (about 30%).
US institutions and European mutual funds are required to disclose their B-share ownership, and as far I can see from the roster they already accounted for >50% of shares. I am sure they will put up a fight.
Roura Grifols Family 9.2%
Scranton Enterprise 8.4%
Gras Grifols Family 7.1%
Ralledor Holding 6.2%
This has become a really interesting “game theory” type trade. I initially put the trade on as long 1 B-share, short 1 A-share. I think the majority of B-share holders are primarily concerned with the absolute level of the consideration they receive and not the spread vs the A-shares. Most of these investors bought shares when there was a significant spread. Consider the following 2 alternative offers and how the B shareholders would react: 1) 12 euros for B shares and 12 euros for A shares, or 2) 12 euros for B shares and 13 euros for A shares. I think the initial reaction by the B shareholders would be to resist, but I think when the buyer emphasized that the A shareholders wouldn’t agree without a premium, the B shareholders would consent. I understand that the public statements have noted that Brookfield is behind the idea of the B shareholders receiving a discount to the A shareholders, but I believe those statements are based upon Brookfield’s belief that in order to get the A shareholders on board they need to offer them a premium. There is a strong argument that the A shareholders “deserve” a premium and the A shareholders are much more likely to unified in their voting.
The Grifols family dominates the A shares but (as far as I know) doesn’t own any B shares.
I don’t know whether the family is allowed to vote their shares, but if they can and their votes count, the consortium will need fewer third-party votes to win approval from A shareholders.
So maybe the views of A shareholders actually matter less than B.
Another Bloomberg article about Grifols. This time, the company (not investors) is looking to hire an external consultancy firm to deal with minority investors as the takeover looms.
I see this as a direct response to investors hiring a law firm to defend their rights from last week. It looks like the company sees trouble ahead and is looking for a fairness opinion. Low ball offer coming?
“A group of Grifols SA investors including Flat Footed LLC, Mason Capital Management LLC and Sachem Head Capital Management LP is seeking a seat on the Spanish drugmaker’s board.
The investors manage a combined stake of 7.7% of Grifols class A shares and say they want to exercise their statutory right to name a director, according to a press release. “We are doing so with the goal of maximizing shareholder value and improving corporate governance, for all shareholders,” the group said in the statement.
The three firms want Paul Herendeen to represent them as director, and sent a letter to the Grifols board on Thursday. “
Another day, another “Expansion” article/leak.
https://www.expansion.com/empresas/industria/2024/09/16/66e7453e468aeb23078b4595.html
Only a few items worth highlighting:
1) Brookfield is working on an offer at “around 11 EUR” per share (presume A shares)
2) Still looking for EUR 2bn from co-investors for the equity portion
3) Debt market eager to provide financing
4) Still not found a way to screw B holders, offer conditional on paying less to B share holders likely
There’s another Brookfield-related situation going on right now.
It can be an interesting idea on its own. @dt
It can also shed light on how Brookfield may handle Grifols in the future.
Brookfield completed a tender offer for alstria office REIT (AOX) in Feb 2022, acquiring 93.4% of its shares.
However, in association with the tender, Brookfield signed a standstill agreement with the company not to squeeze out the remaining shareholders for at least three years (expiring Feb 2025).
On Sep 18, Brookfield sent a request to the company to initiate the squeeze-out process. Minority shareholders will receive “an appropriate cash compensation” to be determined and published separately.
https://alstria.com/ad-hoc-notification-pursuant-to-article-17-mar-5/
And then a general meeting will take place in Q1 2025 to approve the squeeze-out.
Since the squeeze-out is initiated before the expiration of the standstill agreement, Brookfield will also indemnify the company for any compensation to minority shareholders resulting from the loss of public REIT status in Dec 2024 and related tax benefits.
AOX stock price spike up 60% to 6 euro/share after the news.
However, this is still 36% below the latest published NAV of 9.45 euro/share.
I assume that the cash-out price for minority shareholders will be determined based on a “fair value” and/or the price Brookfield last paid in acquiring shares.
This appraisal exercise seems to be very straightforward for a REIT, vs. for a business franchise like Grifols.
(1) the last published NAV is 9.45 euro/share. (In the last tender, Brookfield paid a 6.8% premium to NAV).
(2) Brookfield’s last tender offer was 19.5 euro. However, since then the company has paid dividends of 5.72 euro (mainly special dividends). So ex-dividend the last acquisition price was 13.78 share/euro.
I think Brookfield will pay anywhere between 7.56-10.1 euro, representing 26%-68% upside from current price of 6 euro.
Bear case: Brookfield offers 20% discount to NAV , or 7.56 euro;
Base case: NAV of 9.45 euro;
Bull case: 6.8% premium to NAV, or 10.1 euro.
Correction: typo in my post above. Brookfield owns 95.37% of AOX, not 93.4%.
So Brookfield already passes the 95% threshold.
For a Squeeze-Out under Stock Corporation Law, Brookfield is allowed to vote its shares in the general meeting, so the approval is just a formality.
What Brookfield can’t control is the squeeze-out price, which will be determined by a court-appointed auditor. (of course, if the price determined by the auditor is too high, Brookfield can decide not to proceed.)
Brookfield paid 3.3 billion euro for the 95.37%, and has received 979 million in dividends.
To acquire the remaining 4.63% (8.26 million shares), even if they have to pay 10 euro/share, the cost is less than 83 million euro.
I really like the idea, but what makes you think NAV is the determining factor for the price being paid?
Currently there is two more comparable squeeze outs going on in Germany that I can think of. From what I see Lenovo is paying way above NAV for Medion AG and Atlantic BidCo is paying way less than NAV for Aareal Bank AG. They are three different businesses, but still I dont see the connection. What I do see is that the price being paid is pretty close to the average stockprice over the 3 months prior to the squeeze out announcements. In 2010 the “Bundesgerichtshof” in Germany decided that the revenue weighted stock price prior to the announcement is the determining factor for the consideration being paid to the minority shareholders. (Beschluss II ZB 18/09)
Did that change since back then? Or are there any current examples of the consideration being based on NAV?
Hi @julir1 ,
I believe NAV is the more obvious reference point for AOX’s squeeze-out price, for a few reasons explained below:
(1) AOX is a REIT, and there are well-established valuation standards for a REIT and for properties.
So the “fair value” to be determined by the court-appointed auditors (following standards developed by the German Institute of Accountants) is likely to be very similar to the NAV determined by the current auditor based on both the European Public Real Estate Association (EPRA) rules and the German accounting rules.
For Medion and Aareal Bank, fair value can be quite different from GAAP-based net equity numbers.
(2) When Brookfield made the tender offer in 2021, AOX board was required to issue a 100-page Reasoned Statement explaining why they believed the offer price (6.8% premium to NAV) was fair, and their main reference point for fair value was the NAV.
(3) AOX is sitting in Brookfield’s flagship real estate fund BSREP IV, which isn’t performing well so far (gross IRR=9.9%, well below its target of 20%), while they are currently raising money for BSREP V and hope to hit the $15 billion target by year end (so far $9 billion has been raised).
And AOX is not performing well for the fund. As you’ve already seen, their ex-dividend cost basis is 13.8 euro/share, and the current market price is only 6 euro/share even after the 60% spike.
It’s likely that in BSREP IV they are still marking the AOX investment at NAV of 9.45 euro/share, arguing that secondary trading price is irrelevant to the real value of this investment.
So the last thing they want to do is to transact at a lower price than the NAV, trigging mark-down of their investment in AOX, or raising any doubt about its value.
(4) They paid 3.3 billion euro for the AOX shares, and buying out the remaining 4.6% at NAV will cost less than 80 million euro, which will add only 2.2% to the total cost.
(5) As Brookfield is willing to go to all the trouble to not wait just another 4-5 month for the standstill agreement to expire in Feb 2025 (after already waiting for 2 years and 7 months), I think Brookfield is really eager to delist the company at all cost.
Their eagerness can be driven by many factors, I am guessing, e.g., they may believe that German office market/sentiment is about to inflect, or as a private company they may find it easier to refinance an impending debt maturity, or handle complex situations that tend to generate negative headlines for a public company.
The 3 month weighted average price is used as a minimum.
So the squeeze-out price can never be lower than the average traded price over the last 3 months. And, if minority shareholders dispute the squeeze out price determined by the auditor, the court can only revise it up and not down.
So minority shareholders are very well-protected if not over-protected in Germany, which encouraged some of them to hold out in one case (Vodfone/Mannesmann) for 18 years…
Fortunately, while they can hold out for themselves and fight for their appraisal rights, they can’t stop other shareholders from accepting the offer.
Any idea why AOX is up 10%+ today?
No idea. It was up 19% at some point during the day.
Someone must have known something. Maybe the fairness valuation report is coming out soon?
Shareholder meeting is not expected until Q1 2025.
Hi @snowball,
The latest NAV per share is 8.14. It is lower due to the deferred tax liabilities from losing REIT status. Does this change your view on the upside?
In the first tender offer back in 2021, Brookfield framed its offer price around the EPRA NTA (net tangible assets), which I believe is Brookfield and AOX board’s preferred definition of NAV (net asset value) vs the accounting-based NAV also reported in AOX’s financial statements. (Most of the time the two definitions return similar numbers.)
PR from November 4, 2021: “Brookfield to launch a voluntary public takeover offer at a price of € 19.50 per share in cash, offering alstria’s shareholders a premium of 6.8% to last reported EPRA NTA.”
EPRA NTA declined by 6% from 9.45 euro/share in Q2 to 8.89 in Q3 2024, while the accounting-based NAV declined by 14% from 9.42 to 8.14.
So I would say 8.89 euro/share is our new reference point.
I don’t think the accounting-based NAV (which deducts the deferred tax liabilities) is relevant here.
The tax liabilities are assuming that AOX will somehow maintain an inefficient non-REIT corporate structure after the squeeze out, which is not likely.
Thanks a lot for the detailed explanation!
“Hamburg, December 13, 2024 – alstria office REIT-AG (symbol: AOX, ISIN: DE000A0LD2U1) („alstria“ or the „Company“) announces that alstria’s management board today received a confirmation and specification of the squeeze-out demand submitted by BPG Holdings Bermuda Limited (“BPG Holdings”), a subsidiary of Brookfield Corporation, on September 18, 2024. In this context, BPG Holdings has announced that the implementation of the squeeze-out under stock corporation law will be carried out by BPG Holdings and that the cash compensation to be paid to the minority shareholders in accordance with Section 327b para. 1 of the Stock Corporation Act (Aktiengesetz, AktG) in return for the transfer of their shares has been determined at EUR 5.11 per share.
The squeeze-out under stock corporation law will only become effective upon the approval of the extraordinary general meeting and entry in the commercial register. The extraordinary general meeting to pass the resolution on the squeeze-out shall be convened for Q1 2025”
————————————————
What do you think is the likely outcome of the extraordinary general meeting here? EUR5.11 is obv far below expectations.
It’s 5.11+2.81=eur 7.92/share.
There is another euro 2.81/share of “compensation payment”, announced in a separate PR.
“Hamburg, December 13, 2024 – alstria office REIT-AG (symbol: AOX, ISIN: DE000A0LD2U1) (“alstria” or the “Company“) announces that today, the compensation payment, which according to Section 20 of the Company’s articles of association in the event of the termination of the tax exemption to shareholders who, at the time of the termination of the tax exemption, hold less than 3% of the voting rights in the Company (“Free Float Shareholders”), was set at EUR 2.81 per share (“Compensation Payment”). “
Squeeze out price for AOX has been determined.
Brookfield will pay eur 5.11+ 2.81 = eur 7.92/share, 5.11 being the “cash compensation” and 2.81 being the “compensation payment” (for the loss of REIT status).
7.92 is at a 11% discount to the Q3 EPRA NTA of 8.89 euro/share.
AOX is currently trading at around 7.7 in after market session, a very narrow spread of about 2-3% to 7.92, with closing expected Q1 2025 or early Q2.
I am fine with a 30% return and have exited the trade.
I think the market is confused and may not have fully realized that the 2.81 “compensation payment” is subject to 26.4% tax (for details see the bottom of this message), and that AOX is now in effect trading at a premium to the after tax squeeze-out consideration.
However, it’s also possible that I am wrong, that,
(1) there’s a possibility that Brookfield will raise the squeeze-out price.
(2) 2.81 “compensation payment” may be subject to lower tax rate.
Anyway, I don’t think I understand the above two matters well enough, and I am a happy man, having exited.
“In line with the articles of association, the management board has determined that the Compensation Payment will be credited automatically to all the Free Float Shareholders which hold shares on December 31, 2024. The Compensation Payment is generally paid out via Clearstream Banking AG by the custodian banks after deduction of 25% capital gains tax and the solidarity surcharge of 5.5% (26.375% in total) and, if applicable, church tax on the capital gains tax. It is expected to be credited to the Free Float Shareholders around January 9, 2025.”
Snowball,
Thanks very much for sharing this idea!
My bad, totally missed the second PR. Not quite as big of a slam dunk as the original pitch, but still a great outcome. Thanks for sharing the idea Snowball!
Reading that comment on the compensation payment, doesn’t it read like it’s paid out on an after tax basis?
Reading again it might just be a translation issue
Congrats on the call and thanks for the idea!
Obviously 7.92/sh is a great outcome, but I must admit the split between the payment from Brookfield and the dividend arising from the loss of REIT status surprised me. My understanding is that the dividend for loss of REIT status is independent from the squeeze out compensation payed by Brookfield. It would need to be payed by AOX by EOY even if Brookfield did not squeeze out minorities, as the 15% free float requirement for REITs is in breach.
So it seems that Brookfield are not using NTA as the baseline for their squeeze out compensation given that they are paying 5.11 (a 57% discount to NTA). It will be interesting to see how this develops, and if this will be enough to satisfy the court appointed auditor that the amount is adequate. I think there is still a bit to play for here, although the “easy” money has probably already been made.
According to @snowball’s write up above, the squeeze out price is determined by the court appointed auditor and at this stage it would seem this price has already been approved by them.
Yes, the easy money has been made, and the remaining play is more complex (currently in the “too hard” tray for me).
In after market trading, AOX price initially jumped to as high as 8.74, but this enthusiasm lasted for only 45 mins or so, and price gradually settled down to 7.7.
This may suggest that some investors have remained hopeful of a bump in the squeeze out offer.
However, I tend to think that German REITs typically don’t attract much smart money, and the remaining 4.6% holdouts in AOX (many of whom refused to sell at 19.5 three years ago, or 13.78 adjusted for dividends received) tend to be retail/irrational/stubborn.
But I will continue to watch the situation, and as I learn more I may re-enter at some point.
To your question about the compensation payment for loss of REIT status, it’s actually not independent from the squeeze out event. AOX will lose REIT status only if the squeeze-out process is on track, otherwise it can always retained the option of restoring to >15% free float .
As explained in the PR: “Squeeze Out under stock corporation law initiated by this excludes any alternative option of restoring the distribution of shares of at least 15% in free float required for a REIT stock corporation (Sections 11 para. 1, 18 para. 3 REITG).”
So I would consider the compensation payment more as a special dividend, and 5.11 is the “ex-dividend” offer.
On the finality of the offer prices, I believe that the compensation payment of 2.81, determined by KPMG, is already binding, because KPMG, although paid by the company, was selected independently by IDW.
For the cash compensation of 5.11 , I think the court will appoint another auditor to review the price, but I am not sure whether this has already been done, because the PR states that “board today received a confirmation and specification of the squeeze-out demand”. The word “confirmation” may refer to court confirmation, but it’s not clear.
So there’s the possibility that the court appointed auditor will dispute the price, but I don’t expect there to be a large difference, given how standard the valuation rules are for real estates/REITs, and how close the total consideration is to the latest EPRA NTA.
Thanks snowball, you’ve given me some things to think more about. I thought that since AOX was on track to lose its REIT status by EOY anyway that the 2.81 dividend would not be counted toward the consideration payed to minority shareholders (for determining adequacy). But it seems that this is potentially not the case for the reasons you mention. I look forward to reading the reports on the compensation when they come out to understand this better. Cheers!
@dand33
If last time was any guide, I expect that it will take about 7 weeks (early February 2025) for a very detailed “Reasoned Statement of the Management Board and the Supervisory Board” to be issued.
(In 2021, Brookfield made a formal offer on 11/04/2021, and AOX board published a ‘reasoned statement” on 12/23/2021)
FYI the valuation report for the cash compensation has come out.
https://alstria.de/wp-content/uploads/2024/12/Bericht-des-gerichtlich-bestellten-sachverstaendigen-Pruefers-IVA-VALUATION-ADVISORY-AG.pdf
Can’t find an english version so am relying on google’s pdf translation. It seems that the valuation report is rejecting NAV as the basis on which to determine the cash compensation, and is instead using a PV model to arrive at the 5.11EUR/sh.
Some highlights:
“559. In summary, we note that the loss of REIT status was also taken into account as a reduction in value when determining the NAV. Basically, the loss of REIT status and the squeeze-out of alstria are two different measures that have nothing to do with each other, but occur almost simultaneously.
…
590. We consider the earnings value method used in this case to determine the cash compensation to be fundamentally suitable and the determined amount of the earnings value of €5.11 to be appropriate. However, we also consider the NAV approach to be fundamentally suitable and the amount of the NAV we determined in a range of €6.45 to €8.05 to be appropriate. In our opinion, the final assessment of the appropriate amount of the cash compensation in this case is a legal question.
591. As a result, we therefore find that the cash compensation of €5.11 per share set by BPG Holdings Bermuda Limited is appropriate, provided that the Hamburg Regional Court does not consider the NAV approach to be preferable to the earnings value in this case. If this is the case, the appropriate cash compensation would be determined based on the NAV approach in a range of €6.45 to €8.05.”
Some discussion on AOX here: https://www.wallstreet-online.de/diskussion/1208024-1-10/alstria-office-reit-hohe-rendite-u-profitieren-immobillien-wertsteigerungen
@dand33
The AOX discussions on Wall Street Online forum are very interesting. Definitely worth looking into, with the help of translation tools.
After the special dividends are paid in Jan 2025, I hope Mr. Market may present new trading opportunities, and let’s be prepared.
Stock now trading ex-div at a 5% premium to 5.11 squeeze out price
IVA (the court-appointed auditor) actually left open the possibility for the Hamburg Court to use the NAV as the preferred method of valuation.
IVA provided valuation numbers based on both DCF (€5.11 )and NAV (€ 6.45 to € 8.05).
AOX currently trades at €5.34, 4.5% premium to the DCF-based offer, but 17% discount to the lower bound of the NAV-based compensation number.
“As a result, we conclude that the cash compensation of €5.11 per share determined by BPG
Holdings Bermuda Limited is appropriate, provided that the Hamburg Regional Court does
not consider the NAV approach to be preferable to the capitalized earnings value in the
present case. Should this be the case, the appropriate cash compensation would have to be
set within a range of € 6.45 to € 8.05 based on the NAV approach.”
“We consider the capitalized earnings value method used in the present case to determine the cash compensation to be generally appropriate and the determined amount of the capitalized earnings value of € 5.11 to be appropriate. However, we also consider the NAV approach to be generally appropriate and the amount of the NAV determined by us in a range of €6.45 to €8.05 to be appropriate. In our opinion, the final assessment of the appropriate amount of the cash compensation in the present case is a question of law.”
The AOX deal will be closed in a few weeks and shareholders will receive 5.11 euro/share. The stock is currently trading at a 10% premium.
I guess some shareholders will sue and the legal proceedings may last many years, but they won’t be able to stop the deal from closing.
If I short the stock, will I simply be required to pay the cash offer price after closing, or will I have to buy back and cover my short prior to closing?
Interesting. AOX shareholders have filed lawsuit for annulment of the EGM resolutions.
Announcement pursuant to Sections 246 (4) Sentence 1 and 249 (1) Sentence 1 of the German Stock Corporation Act (AktG)? The Management Board of alstria office REIT-AG announces, pursuant to Sections 246 (4) Sentence 1 and 249 (1) Sentence 1 of the German Stock Corporation Act (AktG), that shareholders have filed an action for annulment (Section 246 AktG) and an action for nullity (Section 249 AktG) against the resolutions passed at the Extraordinary General Meeting on February 11, 2025, on agenda items 1 (resolution on the amendment of the Articles of Association due to the termination of REIT status) and 2 (resolution on the transfer of the minority shareholders’ shares to the majority shareholder, BPG Holdings Bermuda Limited, in return for an appropriate cash settlement pursuant to Sections 327a et seq. AktG (exclusion of minority shareholders/squeeze-out under stock corporation law)). The action was filed with the Regional Court Hamburg, Chamber 1 for Commercial Matters, and is pending under case number 401 HKO 21/25.
More rumors:
Brookfield reaffirmed its interest in acquiring Grifols and requested additional time to complete due diligence, according to sources. Brookfield had initially expressed interest in a joint takeover with the Grifols family earlier this year. The PE firm has also begun securing funding for the potential deal.
Spread between share classes stands around 20%.
https://www.reuters.com/markets/deals/brookfield-reaffirms-its-interest-grifols-ask-more-time-analysis-sources-say-2024-09-30/
According to Spanish media, the GRFS takeover is facing further delays, as Brookfield has reportedly not yet secured financing. This could push the timeline back by at least another month. Despite that, rumors suggest Brookfield remains committed to the transaction. The discount between Class B and Class A shares has widened to 22%.
https://www.elconfidencial.com/empresas/2024-10-28/brookfield-retrasa-opa-grifols-tension-financiacion_3990640/
https://www.plantadoce.com/empresa/grifols-modera-su-caida-en-bolsa-al-239-ante-el-posible-retraso-en-la-opa-de-brookfield
Mason Capital, with a 2.1% stake in Grifols, opposes the potential sale to Brookfield at €12/share, arguing it undervalues the company. They criticize Grifols’ board, particularly family-affiliated directors, for conflicts of interest and poor capital allocation, noting debt-heavy acquisitions that haven’t boosted EBITDA. Mason estimates Grifols’ value at over €20/share and argues that an independent board could unlock further shareholder value.
https://seekingalpha.com/news/4268552-grifols-holder-mason-capital-against-potential-brookfield-deal
https://seekingalpha.com/pr/19909697-mason-capital-management-highlights-corporate-governance-failures-and-significant-shareholder#hasComeFromMpArticle=false
BAM’s efforts to secure financing for GRFS’ debt refinancing are advancing, with banks set to submit their final proposals next week. Bloomberg reports that the debt refinancing deal could be finalized by the end of the month, paving the way for the total buyout financing to be secured later this year.
Interestingly, the Spanish outlet El Confidencial claims that BAM has already secured €11bn refinancing deal from Deutsche Bank and Santander. This contradicts Bloomberg’s report, despite their similar publication timelines.
Anyways, the news are obviously positive and the deal seems to be moving forward. A/B class discount remains at 18.5%.
https://www.bloomberg.com/news/articles/2024-11-14/banks-to-pitch-roughly-11-billion-buyout-debt-deal-for-grifols
https://www.elconfidencial.com/empresas/2024-11-14/brookfield-santander-deutsche-opa-grifols_4002930/
The Bloomberg report mentioned that “While it’s normal for a certain amount of back-and-forth to take place before banks are appointed, the Grifols deal has taken an unusually long time to complete. Lenders have grown frustrated by the number of proposals and Brookfield’s due diligence process, the people said.”
So it’s possible that Deutsche/Santander was selected in the previous round of negotiation (for a package of 9.5 billion euro) , and then Brookfield, sensing the very strong interests from banks, is asking for bigger size (now 11 billion euro) , lower interest rates and more participants.
Maybe, but El Confidential specifically said (translated with Google): “Brookfield raises 11 billion euros from Santander and Deutsche to launch takeover bid for Grifols […] According to sources close to the operation, the Canadian private equity fund has closed with Deutsche Bank and Banco Santander the refinancing of the company’s debt for 11 billion euros, the largest syndicated loan signed in Spain. An agreement that paves the way for launching the takeover bid for the blood plasma manufacturing group.”
Snowball,
I wasn’t able to respond directly to your message of 2/27, so I am responding to this message. I have been short a couple of US acquisitions through the acquisition and at the time of the merger they were simply treated as if I had covered my short at the acquisition price. However, in one case (Dole) the eventual settlement of the lawsuit (years later) resulted in a significant payment being taken from my account.
@tom,
Thanks for sharing your experiences.
In the Dole case, weren’t Murdock and Carter responsible for the additional $2.74/share?
If you had to pay $2.74/share to the shareholders whom you borrowed stocks from, shouldn’t you be entitled to the same amount from Murdock and Carter, since you (as the borrower of stocks) were the shareholder on the register at the time of merger?
Did you take this up with your broker?
First off, I don’t think I am the shareholder of record at the time of the merger. I think the guy I sold the shares to when I shorted the stock is the shareholder of record.
A couple of points: 1) Arguing with the broker is pretty fruitless (although I tried), the court had already ruled how the payments should be made, 2) The parties realized they had a big problem when the number of claims exceeded the number of shares. Think about it, if I borrow X shares. Both the guy I borrowed the shares from and the guy I sold the shares to have legitimate claims for the cash. The guy I sold the shares to gets the money from the company; the guy I borrowed the shares from gets the money from me (just as he would if a stock I was short paid a dividend).
This arb has failed. Yesterday’s developments make it unlikely Brookfield will proceeds with the buyout and, more importantly, there was a wide discrepancy in prices offered for class A and class B shares. So my thesis has failed on both fronts.
Brookfield was forced to disclose its intentions regarding Grifols and revealed that it is tentatively considering paying €10.5 per class A share and €7.62 per class B share. That’s almost 30% discount for B shares.
Grifols board swiftly rejected the offer as significantly undervaluing the business.
It’s unlikely Brookfield comes back with an improved bid – discussions have already been ongoing since July, so that’s probably the best Brookfield could come up with. And even if Brookfield rebids, any new offer will mostly likely have the similar discrepancy in prices for A/B shares.
Strangely enough, the board’s response did not even mention that class B shares received a lower offer and referenced only the €10.5 price offered for class A shares. So I am guessing in the negotiation process management was in agreement with Brookfield that class B shares could be paid less than class A ones.
Thanks for your updated thoughts. Interestingly, the spread has remained close to 20% (around 22%) despite the deal likely being off the table and the nearly 30% spread in the offer price. Do you have any thoughts on why the spread hasn’t returned to the pre-deal levels of c.30%?
Brandes recently bought 13.5% of B shares (or 5.1% of all shares). I think Brookfield will eventually have to reduce the discount it offers for B shares, to get their votes for a by-law change.
Note that Grifols is highly leveraged (net debt of €11.5 billion), and B shares accounts for only 38% of all shares. So B shares are only 11% of total EV.
The current offer gives Grifols an EV of €18 billion. Raising the offer for B shares by 10% (to €8.38) will increase EV by only €200m or a meager 1.1%.
I don’t know why Brookfield would like to annoy the B share holders so much for just insignificant savings, unless somehow it just doesn’t want to deal to succeed.
Note that most of the B shares are owned by diversified funds, and they can afford Brookfield walking away and stock price falling 30% back to the low of €6/share. So I don’t see how Brookfield can win by playing a game of chicken with them.
“The San Diego-based investment firm owned 13.5% of Grifols as of Sept. 30, according to a US Securities Exchange Commission filing. The holdings comprised 16,758,727 class B shares and 18,447,582 American depositary receipts, which represent one share apiece.”
Why do you think this deal isn’t dead? The board has rejected 10.5 for the A shares…and as you suggested, B shares won’t accept a discount. It’s also unclear whether the family even still backs the deal because they weren’t mentioned in any of the press releases (unlike when the approach was first announced in July). To get the board to reconsider would probably require at least 12+ and then they have to address the B shares…Ie you’re looking at a couple of billion extra in equity…frankly, i don’t think Brookfield has the money…even in the current ridiculously low bid about 50% of the equity is being provided by 3rd parties (eg Temasek and GIC).
Suppose Brookfield raises the bid for A shares by 14% to €12 and B shares by 25% to €9.5, in will increase the equity check by €1.5 billion.
In terms of EV, the bid will increase by just 8.3%, because Grifols is high leveraged and equity is only 36% of the current offer package.
I think Brookfield can afford to raise the offer (in terms of EV) by 10%. The Grifols deal is more a operational improvement story, where Brookfield hopes to extract value by improving EBITDA and not as much by improving exit multiples.
Note that the €10.5/€7.62 offer is not a formal offer. Brookfield was forced by CNMV to disclose the non-binding indicative offer prices used in the letters it sent to the Board to gain access for due diligence. Typically, I think bidders raise their offers after due diligence and negotiations.
“As requested by the Spanish National Securities Market Commission and in relation to recent media speculation about a potential offer for Grifols S.A. (“Grifols” or the “Company”) and the price of such potential offer, Brookfield Capital Partners (UK) Limited (“Brookfield”) discloses the following INSIDE INFORMATION:
Brookfield confirms further to the announcement of 8 July 2024 (registry number 2307) that, by
letters dated 10 and 11 November 2024 to the Grifols Transaction Committee (which was set up by the Company’s Board on 12 July 2024), Brookfield requested access to certain information to finalize its due diligence. In such letters, Brookfield gave a non-binding indication that it was considering a price of €10.50 per Class A share, representing a 22% premium to the unaffected share price of the Class A shares of 4 July 2024, and implying an equity value for Grifols of €6.45 billion and a price of €7.62 per Class B share, in each case subject to certain conditions.
Whilst Brookfield continues to engage constructively with the Grifols Transaction Committee, at this time there is no agreement or decision regarding the potential offer nor about its potential terms and conditions (including, without limitation, the potential prices). There is no guarantee that an offer for Grifols’ shares will be made. Any further updates will be communicated to the market in accordance with applicable laws and regulations.”
The PR from the board didn’t mention the family because they were responding to a communication filed by Brookfield, not by the family.
Brookfield works with the family (with an exclusivity agreement) to gain their votes and the rollover of their equity, but they are separate and do their own due diligence also separately. They are not a consortium yet.
Since the family owns I believe 31% of A shares, this will also save about €200m if Brookfield raises offer from €10.5 to €12/share.
On the roles of Temasek and GIC, they are not third parties. They are the largest LPs in Brookfield Capital Partners (Brookfield’s flagship PE fund) and other Brookfield funds, and are provided with large co-underwrite/co-invest quotas. (the difference between co-underwrite and co-invest is that in the former they have the privilege of participating in due diligence, etc even before the deal is signed).
You can think of such arrangements as de facto fee discounts. Temasek/GIC invest in the BCP funds with standard fee/carry rates, but the extra amount of capital they are allowed to put into individual deals is charged 0% fee and 0% carry, effectively reducing their average fee expense rate on invested capital.
Large co-investment quotas are major selling points of Brookfield funds to large LPs (peers such as Blackstone are far less generous).
Co-investment opportunities tend to be over-subscribed, so I don’t think it is difficult to secured the capital needed, IF it’s an attractive deal.
Brookfield’s PE fund from which we understand the offer is coming has AUM of c.€10bn. This means the maximum they can put to work from that fund is €1.5-2bn. the family has 19% economic interest so Brookfield has to fund 81% of the equity. At your suggested levels of €12/9.5 that this 81% requires €6bn in equity, ie €4-5bn in co-invest above their internal resources and the family’s stake. And this assumes your prices is realistic. I doubt it is because B shareholder will not accept a discount (why would they??) and even €12 is seen as very low by existing A shareholder. At parity it would require another €600m of equity
2 more points:
1. the family, if they are part of the bidding consortium, will not be allowed to vote on the deal. Also, the deal requires 66% approval. Generally only 60-70% of holders vote on deals. This means that if 14-16% of class A holders vote against the deal, it fails. Mason, Flat Footed and Sachem Head hold c.8%. Brandes another 3%. That’s nearly enough to block the deal with just these 4 holders. Highly unlikely this passes at €12
2. This would one the largest PE deals in Europe ever. I don’t think you can just assume that getting the money is no problem because people like to co-invest. Getting €4bn in co-invest capital is a very different story than the usual couple hundred million
@Avi
Brookfield (BAM) is known for being able to do a very large deal with a relatively small fund.
They were going after Medline in 2021, and lost out to the Blackstone-Carlyle-H&F consortium.
They were biding from their BCP V fund ($9 billion), and the deal required a >$17 billion equity check.
The fact that Brookfield was selected for the last round of bidding suggested the seller (Mills family) believed BAM’s bid was credible.
At the time I was very surprised that BAM was there on the table.
Later in one of the earnings call of BN (BAM’s parent), Bruce Flatt explained how they could manage such a mega-size deal (without naming Medline).
Basically, money can come from many sources: the BCP fund, co-investors, BBU, other Brookfield funds (special investments, mezzanine debt, Oaktree), insurance floats from BNT (Brookfield Wealth Solutions).
Also, their real estate/infrastructure funds can come in to do sale-and-lease-back on Medline’s hard assets (distribution centers, etc).
Most importantly, if needed, BN itself can step in to provide multi-billion dollar support to bridge the gap.
I raise the Medline example not only because the funding situations are similar, but also because the two businesses are similar in many aspects . My gut feeling is that BAM has a thing for infrastructure-like healthcare businesses such as Medline and Grifols, and they are eager to do a deal after missing out on Medline three years ago.
Although I am more optimistic about BAM coming back with an improved offer (for both A and B shares, and more for B shares), I don’t think the current risk/reward of a paired trade (long B/short A) is attractive.
The downside is small at (7-10%) (depending on whether the BAM simply walk away or the current offer is somehow railroaded through) , the upside is even more limited (maybe 3%) because the market currently has already priced in a 7% discount improvement for B shares.
If we believe that BAM will come back with an improved offer that the Board/shareholders will agree to , simply long the A shares provides more asymmetrical risk/reward.
I am even considering turning around 180 degrees and long A /short B instead, or just short B.
Is there a way by which the family/Brookfield can force the B holders to accept a discount? Otherwise i don’t understand why you say the upside would be “maybe 3%”. From current spread levels there is 30% upside to parity. Why would any B holder accept less?
No, they have to ask B shareholders to approve the change of by-laws.
I come to the 3% upside number by assuming that BAM will reduce the B share discount by 10% in their improved offer, and unfortunately the market has already priced in a 6-7% reduction.
Suppose Brookfield raises the bid for A shares by 14% to €12 and B shares by 25% to €9.5, I think those activists (Brandes, Flat Footed, etc) are going to take the money and go away.
No matter how vocal they are currently about the unfairness of being paid less than A shareholders, I don’t think they are insisting on parity.
Note that these B share activists are unhedged. They have to report short positions >0.5% of float, and I haven’t seen any disclosures filed.
So if BAM raises the offer for A shares and reduces the discount for B, they are making decent profits within a short period of time. And if BAM walks away, their downside is significant given that they are unhedged.
So this is what I believe to be the most likely outcome and I am thinking about how to trade based on this view.
I turned around and long A/short B prior to the announcement, because I didn’t believe the risk/reward for long B/short A was attractive (downside 7-10% vs. upside 3%).
Closed the position after the announcement. However, very interestingly, the discount narrowed again later that day, so I re-entered the long A/short B trade.
I think the B share discount should go back to >30% (vs. currently 25%). With no other suitors in sight, and market’s realization that buyers can offer different prices for A/B shares, I don’t think the discount has any risk of narrowing.
The potential upside of long A/short B is not large, but I think risk/reward is asymmetrical. Brookfield seemed to walk away not because of valuation but for something more fundamental that they discovered.
Bloomberg report: “The firm’s decision to abandon its bid was in no small part because it clashed with the family and in effect sought what in the M&A world is called a “gracious exit” by making an offer the board could not accept, people familiar with the matter said. A spokesperson for the family said it couldn’t agree with the price Brookfield was offering.
The fund was also not getting the information it needed in going over the company’s books, the people said, declining to be identified discussing information that isn’t public.”
Brookfield won’t say “we had to walk because we couldn’t come up with the money”…2 things do point in this direction though:
1. the indicative offer was exactly where they leaked to the press that they would bid since July, so they didn’t suddenly lower the offer to graciously exit. Also, press reports from the beginning said the family wanted a higher price.
2. Grifols filing to the Spanish regulator states:” This announcement comes after a comprehensive due diligence exercise has been conducted, with Brookfield granted access to all requested information.” Imho a submission to the regulator carries more weight than some unnamed person venting to Bloomberg
B shares’ discount to A shares, currently at 22-23%, is too narrow, considering its historical average of 30-40% and what had just happened to the company (e.g., Brookfield walking away without negotiation, no hope of a new bid in the near future, impending debt maturity).
The current discount is more or less the same as when the Brookfield bid was still considered likely, which is very puzzling to me.
One reason for the “mispricing” of a €6.7 billion market cap company could be that the B shares are not very liquid.
A large risk to a long A/short B trade I can think of is that somehow A shareholders decide/agree to make the two share classes interchangeable. I don’t know why they would do it. Maybe as the family’s last attempt to win back the trust of the capital market?
@avi
What Brookfield states in the disclosure is technically correct.
They were indeed granted access to all info they requested from Grifols.
But they also requested related party information (between Grifols and Scranton) from the family, which likely was denied.
The idea of merging classes a and b has been floating around for some time, most recently in the context of the takeover attempt
https://www.eleconomista.es/salud/noticias/12628793/01/24/grifols-prepara-nuevos-planes-de-reduccion-de-deuda-con-la-union-de-sus-acciones-captara-600-millones.html
https://www.eleconomista.es/capital-riesgo/noticias/13073716/11/24/grifols-unificara-las-acciones-para-allanar-la-opa-de-brookfield-y-ajustar-el-poder-de-voto.html
I rely on Google Translate to read the two reports you mentioned, and another report (about Citi) mentioned by the first one.
The A/B shares unification plan suggested by Citi (in Nov 2022) seems to involve Class B shareholders paying the company €700 million (or €2.7 /share, the A/B price gap at the time) to obtain voting rights, which can help Grifols deleverage too. This is an interesting idea. Do we have more details?
“On this issue, Citi is quite optimistic since “the company has several ways to accelerate deleveraging, such as eliminating the duality of its class B shares [listed without voting rights], something that could bring in around 700 million euros”
Also, the CFO in Jan 2024 seemed to suggest that the benefit of this plan was smaller now (because it would raise fewer money from B shareholders now that both A/B have fallen and the absolute value of A/B gap is smaller), and that he would consider it when stock prices recover (which is not likely now).
CFO: “With regard to the consolidation of shares A and B, it is on the table. When prices return, we will think about it seriously “