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Muddy Waters

Eurofins in war of words with ‘activist short seller’

Pennsylvania based ‘activist short seller’ Muddy Waters has announced it is short on diagnostics and lab testing group Eurofins Scientific because the confusion and contradictions inherent in its financials and operations cause us to believe that it is optimised for malfeasance, rather than for conventional business”. This has provoked a strong response.

Referring to CEO Dr Gilles Martin, who owns about one third of the company, Muddy Waters said: “At best, Eurofins has a parasitic controlling shareholder who has been siphoning money from the company for two decades. Our view, however, is that Eurofins’ financials could contain material overstatements of profits, cash balances and other asset values.”

Among other things, the short seller noted that the acquisitions Eurofins has made have become smaller even as it grows larger, with the average value of the acquired firm falling to $3.1 million in 2023. “The vast majority of the acquisitions don’t meet the threshold for disclosure, keeping much of the spending opaque,” it said.

Muddy Waters also noted that Eurofins’ auditor had to reclassify €682 million of receivables and payables in the 2022 accounts, despite its claims not to be overly complex, and that it was paying Martin much more than it should have been if it was not buying real estate. The implication is that Martin has siphoned money to fund his real estate empire.

In addition, the firm said, Eurofins pays its employees, other than managers of large business units well below industry rates and has raised billions of dollars in recent years, supposedly to fund growth. “In our view, there is an explanation that unifies these, and other, contradictions: Eurofins is optimised for malfeasance. We are unclear how deep the rot goes, but we suspect that it extends to reporting of revenue, profits, cash and other asset accounts.”

In response, Eurofins said that all of the allegations and insinuations are “either inaccurate, irrelevant, biased and/or misleading”. The company “is completely confident in the integrity of its accounts, operational performance, internal controls and risk management”, all real estate transactions have been done “at arm's length terms” and all cash amounts were properly audited at local and consolidated levels.

Eurofins added that Muddy Waters has never participated in its investor events or directly engaged, and indeed stands to gain from a fall in share price. (This happened immediately after the report was issued, though the price has since recovered.) Among the “most blatantly wrong and/or misleading allegations”, Eufofins highlighted:

* Making an unsuitable comparison between Eurofins’ purchase of BioSanté in Martinique to investments in travel and tourism *

Citing some specific local GAAP requirements in how to report cash and equivalents in condensed local statutory accounts filings to build a story about potential double-counting of cash at group level, when all these inter-company transactions are eliminated in the consolidated financials

* Using incorrect addresses and wrong values to paint a purchase from unrelated real estate developers as a deliberate act to facilitate a mark-up of the property via a straw buyer

* Alleging that spreadsheets are extensively used for reporting and with “unacceptably loose internal controls” when the company has actually utilised recognised technologies for many years

* Highlighting that the ratios of revenues and costs per employee are higher than some companies active in the TIC sector, and thus too good to be true, while there are obvious geographical, service and sectoral effects, and Eurofins’ activities are very different from TIC

The company reiterated its confidence in the integrity of its accounts, operational performance, internal controls and risk management. It provided detailed examples of this and vowed to publish more as needed. “It appears deeply slanderous to me, and undoubtably also to our employees, bondholders, shareholders and other stakeholders, to see these baseless accusations levelled against us. We will spare no effort to ensure the truth is made clear to all,” Martin said.

Another investor in Eurofins, David Herro of Chicago-based Harris Associates, also defended the firm, saying that Muddy Waters had “failed to offer a compelling argument”. It had offered no specific instances of wrongdoing and some of its claims were “extremely hollow” in view of Martin’s own stake in the firm, Herro said.

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