Grifols Buyout Falls Through
Our old friend Grifols (GRFS) announced earlier today that the joint takeover bid by its family owners and Brookfield—a Canadian private equity/credit fund—for $6.45 billion has fallen through, sending the stock down approximately 10%. We stopped following the story after a new CEO was appointed earlier this year, fitting the profile of a consultant hired to restructure the business and/or seek buyers for parts or the entirety of the company.
Short-Sellers & PE
After Gotham City Research published a short-seller report on Grifols in January—sending the stock lower and widening credit spreads—the initial plan was to sell the company’s main asset in China to a local strategic buyer. However, securing a decent bid becomes challenging once investors realize you are a forced seller unless it is a strategically significant asset. In July, the Grifols family and Brookfield announced discussions to take the company private, with the family submitting a formal bid earlier this month. Now that the takeover bid has collapsed due to disagreements over the purchase price, the owners have stated they will collaborate with existing shareholders to unlock the company's full potential value.
¿Es muy barato?
We'll leave it to readers to fill in the blanks and draw their own conclusions. However, it’s evident that the people calling the shots at Grifols haven't learned any lessons. We have no potential conflicts of interest to report.
Tim Hall on MicroStrategy
Tim Hall, a (human) former equity capital markets veteran, published an independent blog post (not AI) today analyzing the valuation of MicroStrategy (MSTR). MicroStrategy operates primarily as a leveraged Bitcoin fund while also owning a legacy software business. The company is led by its founder and Executive Chairman Michael Saylor, a well-known crypto enthusiast. MicroStrategy’s strategy makes Larry Ellison’s side hustle as a high-stakes investor seem remarkably risk-averse—MSTR has rallied 400–500% year-to-date.
By his own admission, Tim begins his post by stating he's “a day late and a dollar short” on MSTR—perhaps even a Bitcoin or two.
Is MSTR over-valued?
My simple answer to this question is a resounding “yes”, although like any stock or asset, it is arguably worth what investors are willing to pay for it. Let’s look at the fundamentals. The company’s market value is currently $81.5 billion. Including $7.2 billion of debt valued at pro forma book value for the recent $3 billion issue, the enterprise value of MSTR is around $88.7 billion[1]. The EV can be split into a valuation of the operating business of the company, and the value of the core BTC reserves. Assuming the software design / consultancy business is worth 15x sales – perhaps a generous valuation for a money-losing business – this would value the operating business of MSTR at circa $7 billion, meaning that the BTC reserves are being valued at $81.7 billion. If we subtract the existing book value of debt from the Bitcoin reserves, this will provide an unleveraged value of $74.5 billion for the reserves, meaning that the value of the company’s 386,700 Bitcoins is circa $192,655 per coin, more than double the current value of Bitcoin ($91,985 at close November 26th).
Convertible Bonds
Tim also notes that MicroStrategy has several low-coupon convertible notes outstanding, the most recent of which was issued a couple of weeks ago. A vanilla convertible bond is a hybrid debt instrument with embedded optionality, allowing conversion into common stock if the stock price exceeds a specified threshold (strike price) in the future. The current short interest in MSTR is approximately 15% of the free float.
Why Would Investors Accept Interest Payments on Convertible Debt?
We would add to Tim's analysis by emphasizing that convertible bond investors may accept lower coupon payments in exchange for attractive (long-dated) optionality on the underlying stock. In this case, MSTR stock is extremely volatile due to its leveraged exposure to Bitcoin prices. Given that total assets significantly exceed liabilities, we can reasonably assume a low credit risk of MSTR defaulting on its obligations. Consequently, the high short interest may partially reflect convertible bond traders engaging in delta-hedging to manage their exposures to MSTR stock. And not necessarily traders making outright bets on a decline in the share price.
Prison Rules Apply
By issuing convertible notes, MicroStrategy's management can capitalize on the difference between the stock price and the firm’s net asset value, as well as the high (implied) volatility of Bitcoin. We don’t have a view or a position on MSTR. However, investors speculating on the stock in hopes of triggering a meme stock-style squeeze should be aware that “prison rules” apply when engaging in such risky strategies. When prices deviate significantly from fair value, companies often capitalize on favorable market conditions to optimize their financing costs.
