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Grifols takes a liking to debt to expand

2021-09-27T22:57:23.215Z


The blood products company announces an offer for 2,000 million euros to acquire the German company Biotest


Grifols plasma analysis laboratory, in Parets del Vallés (Barcelona) Gianluca Battista

Investors received last Friday the 17th the announcement of the umpteenth purchase of Grifols with misgivings. Its shares fell sharply in the first hours and recovered even more strongly later, in a sign of the ambivalent feeling that the purchase of Biotest for some 2,000 million euros aroused. The operation is in line with increasing business volume in the plasma segment, but it also shows some impotence in the Catalan laboratory: its inability to reduce

its indebtedness

in a continuous

rally

of acquisitions, situated in June at 6,475 million of euros and that it will skyrocket above 9,000 million once the operation is closed.

As Berenberg's analysts pointed out with some irony - "This is Grifols, what less could we hope for?" They wrote in their first report - the operation is complicated. First is the acquisition of the German TianCheng Pharmaceutical Holdings, which controls around 45% of the capital and around 90% of the voting rights in which the company will invest 1,086 million euros. In parallel, Grifols launches a takeover bid on the rest of the Biotest shares, which will raise the total amount of the transaction to close to 2,000 million euros. The purchase is resolved for the moment through a bridge loan, waiting to attract resources with a debt issue in which the company's management is working.

The TianCheng purchase was an opportunity.

Its owner is the Chinese group Creat, which has seen its goals of increasing volume in the plasma business (it bought Biotest for 1.3 billion in 2017) be frustrated by the doubts of the Committee on Foreign Investments of the United States Administration that a strategic issue for the country to get out of control, he had it in the shop window.

In March, Grifols had already paid 305 million euros for a network of 25 plasma collection centers in the North American country to Bio Products Laboratory (BPL), also owned by Creat.

Faced with the impossibility of increasing scale, the Asian group is also considering selling the rest of BPL, according to

Bloomberg

.

More information

  • Grifols advances to obtain 840 million from the GIC fund

  • Grifols will increase innovation to overcome difficult access to plasma

There is consensus that the purchase has all the logic in what Grifols executives call the “

plasma economics”

, which in the end is the source of 78% of the company's income.

"

Plasma economics

refers to the yield per liter of plasma, our main raw material and the main fixed cost of production. We are therefore talking about taking advantage of more plasma proteins that are not currently used by Grifols ”, says the financial director of the Catalan group, Alfredo Arroyo, by email. The Spanish listed company achieves three plasma proteins from plasma synthesis, but the two main investigations in which Biotest is involved would allow it to add another two to that equation at zero cost: a new fibrinogen with market expectations of between 400 and 800 million euros. dollars and a new immunoglobulin (IgM) that, if it passes the investigations, currently in phase III, could reach between 1,000 and 2,000 million dollars in the market, without there being any competitor. In summary,that each liter of plasma will contribute 11% more revenue and its gross margin would go from 45% today to 50% between 2023 and 2024, when it is expected to be commercialized.

All the analysts make sense of the acquisition. "More plasma, more products and, less significantly, another three million liters of fractionation capacity", to retrieve the Berenberg report. It improves the returns of the main business and expands the network of collection centers with another 26, one of the weak points for the company during the pandemic, since restrictions on mobility have prevented it from obtaining as much raw material as it requires. The company plans to improve its operating profit (ebitda) by 300 million euros in 2024 and 600 million euros in 2026, according to calculations by Banco Sabadell.

But 2024 is still a long way off and all analysts have been struck by the fact that with this acquisition Grifols' debt, which was already quite high due to purchases made in recent years, grows even more.

By the summer, Moody's was already warning that high indebtedness threatened to punish its credit rating.

This week, just when financing is sought and less interesting, it has happened.

Standard & Poor's downgraded it to BB- (from BB) and Moody's downgraded it from B1 to Ba3.

More information

  • Grifols raises the stakes for the US

  • Blood with strategic interest

In fact, in the presentation that Grifols offered to analysts on Friday, just hours after presenting the purchase, it showed a defensive position on the issue of debt. No dividend payments or any other corporate corporation until the debt-to-ebitda ratio drops below four times. Neither S&P nor Moody's expect that to happen anytime soon and, in fact, expect very high multiples in the next year or year and a half. For the first next year it will be between 5.5 and 6 and for the second it does not foresee that it will be below six, and argues it because the effects of the pandemic will continue to leave effects.

“The covid pandemic [...] has raised plasma prices and reduced Grifols collection, dropping 15% in 2020. Levels remained low in the first half of 2021. Considering a gradual recovery in collection of plasma and the 9 and 12 months of time required between the collection and sale of the products, Grifols' income and profits will continue to be affected in the second half of 2021 and in 2022 ″, says the latest report from Moody's. "Certainly their recent history of deleveraging does not support them," said the analysis house Exane BNP Paribas.

With the latter, Grifols has closed a total of 22 acquisitions since 2000, among which those of Seracare (2000), Alpha Assets (entry into the United States, in 2003) and Talecris (in 2010) stand out. Despite the ability to generate cash flows that your business has, it has never gotten rid of high proportions of debt compared to its EBITDA generation. With its 5,300 million euros of turnover, it is the second largest manufacturer of blood products, compared to 8,500 million of the Australian CSL. But, according to Moody's calculations, the debt ratios of both companies are light years away. In August, before the transaction was announced, Grifols was at the multiple of 4.1; the Australian at 1.6.An analyst who requested anonymity commented this week that perhaps Grifols would try to get closer to those demanded by analysts with the sale of non-strategic business. For example, he said, the hospitals division, which barely offers him 3% of revenue. Debt tightens.

Source: elparis

All business articles on 2021-09-27

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