Description

Grifols A/B Spread Trade

This is a special situations trade on the spread between Grifols ordinary A shares and Preference B shares.

This morning, both Grifols and Brookfield put out press releases acknowledging that Brookfield and the Grifols family have signed an exclusive agreement to evaluate a potential acquisition of the entire company. They have requested due diligence access and the Grifols board has held an extraordinary meeting yesterday to discuss this.

For background information on the company and its founding family, including the short seller report saga this year, please read the excellent write-ups and message board discussions by gri24 and HTC2012 which were both published in March.

This idea is a very straight forward trade with attractive asymmetric upside/downside.

A/B shares background

In 2011, Grifols issued its Class B preference shares as part of the company's acquisition of Talecris Biotherapeutics, which was a strategic move to expand its market presence and capabilities in the biopharmaceutical sector. These shares were designed as non-voting shares to avoid diluting the voting power of the existing Class A shareholders​, i.e. the Grifols family, while enabling a listing in the US for the existing Talecris shareholders to receive an equity portion in the transaction (the deal offered $2.5bn in cash and $1.2bn in Grifols equity). Though the B shares have no voting rights, they have full economic tag along rights. The family’s voting power remained intact at around 31% while its economic interest fell to around 19%.

As the company’s troubles grew during the pandemic and thereafter (check out the write-ups mentioned above for details), the spread between the A shares and B shares widened, reaching levels where at times the B shares traded at a more than 40% discount to the A shares in 2020-2021. As things started to slightly improve, the spread narrowed to around 30% over the past 18 months which is closer to the 15-25% ‘normal’ spread prevalent between voting and non-voting shares in Europe. On conference calls the company has often mentioned its wish to narrow the gap.

This brings us to today. Here’s what the company’s articles of association and annual report state regarding the B shares:

Articles of association:

“Each Class B Share shall be treated in all respects, in spite of having a lower nominal value, 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.”

“Redemption event. Each Class B Share entitles its holder to obtain its redemption as set forth in this section 4 in the event that (each offer that meets the following requirements, a “Redemption Event”) a tender acquisition offer over all or part of the shares in the Company is made and settled (in whole or in part), except if holders of Class B Shares have been entitled to participate in such offer and to their shares acquired in such offer equally and on the same terms as holders of Class A Shares (including, without limitation, for the same consideration). Maximum percentage of Class B Shares to be redeemed in a Redemption Event. Notwithstanding the foregoing, the Class B Shares redeemed as a result of a specific Redemption Event will not be allowed to represent, as regards the total Class B Shares in circulation at the time the tender acquisition offer that gives rise to the Redemption Event is made, a higher percentage that the sum of the Class A Shares (i) to which the offer giving rise to this Redemption Event is addressed, (ii) held by the offerors of that offer; and (iii) held by the persons acting together with the offerors or by the persons that have reached some kind of an agreement regarding the offer related to all Class A Shares in circulation at the time the tender acquisition offer that gives rise to this Redemption Event is made.  In the event that as a result of the application of the limit referred to above not all Class B Shares regarding which the redemption right of this Redemption Event has been exercised may be redeemed, the Class B Shares to be redeemed from each holder of Class B Shares shall be reduced in proportion to the number of Class B Shares regarding which such holder has exercised the redemption right so that the above referred limit is not exceeded. “

“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.”

From the annual report:

“Each Class B share is entitled to receive, in addition to the above-mentioned preferred dividend, the same dividends and other distributions as for one Grifols ordinary share.  • 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. “

Bottom line, if there’s a deal, the spread closes to zero.

Asymmetric upside/downside:

As of this writing, the B shares are trading at a 22% discount to the A shares. This means that if a deal happens, by buying the B shares and shorting the A shares we make 28% on the capital deployed into the B shares. As mentioned earlier, over the past 18 months, the discount has hovered around 30%. It was around 32% at tis widest point over the past 18 months and at its narrowest, it was around 25%. As of Friday’s close, the discount was 29%. Therefore, if the family, and Brookfield were to walk away, the downside on the trade (back to a discount of 29%) is -9%.

Furthermore, without getting into a subjective discussion of probabilities for a deal, I would make 2 arguments in terms of upside/downside:

1. Brookfield teamed up with the Grifols family is a highly credible group who have very deep knowledge of the business. If they took this step, they are likely serious.
2. With this discussion now in the open, and arbs potentially looking at this more closely, it is quite possible that the spread doesn’t return to 30% even if the deal breaks because the market will be more aware of the tag along rights and the idea that a deal could happen in the future.

In summary, this is a highly asymmetric bet that will probably play out within a few weeks/months., with 28% upside and somewhere between zero and 9% downside.

Catalyst

Formal offer for Grifols