Eurofins Rejects Muddy Waters Attack as Shares Edge Back Up

(Bloomberg) -- Eurofins Scientific SE rejected allegations made by Carson Block’s Muddy Waters Research that caused its stock to plunge the most in two decades, saying it’s confident in the integrity of its accounts.

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The laboratory-testing company defended its accounting system and said its growth over the past two decades should back up its investment decisions, dismissing the short seller’s report as “insidious allegations.”

The stock regained some of the lost ground on Tuesday, rising more than 6% in Paris trading after Monday’s 16% decline.

Eurofins defended an acquisition in Martinique, higher labor costs and the way it reports cash and equivalents. The company will work with its auditors to prepare further analyses, it said.

“Trading is likely to remain choppy in the near term,” Nupur Gupta, an equity analyst at AlphaValue, wrote in a note. The firm is keeping its positive stance on the stock given Eurofins’s “market leading position in niche-testing end markets.”

Muddy Waters disclosed a short position on Monday and cast doubt on Eurofins’s financial statements in a 35-page report, saying they could contain “material overstatements of profits, cash balances, and other asset values.” It also criticized property transactions and labor costs.

The company’s costs per employee are high because it uses highly skilled staff to test for the pharma industry, it said. Luxembourg-based Eurofins also offers testing services to makers of food and cosmetics, among others.

The company said it’s confident in the integrity of its accounts, operational performance and internal controls. “We have been and always will be committed to fair and clear disclosures,” said founder and Chief Executive Officer Gilles Martin.

Eurofins’s use of real estate, which is owned by Martin’s family and leased back to the company, is open to criticism, CIC Market Solutions analyst Arnaud Cadart wrote in a note to clients. The other reproofs from Muddy Waters “are excessive, not to say inane,” he wrote.

Since before the start of trading Monday, the value of the Martin family’s stake in Eurofins has dropped by about €398 million. The clan holds 32.7% of the shares and 66% of voting rights, according to the company’s latest annual report.

It’s not the first time that Luxembourg-based Eurofins has been targeted by a short seller. In 2019, ShadowFall criticized the company’s governance, accounting at subsidiaries and debt levels. Eurofins defended its governance practices and rejected ShadowFall’s criticism as inaccurate and unfounded, though it did take steps to improve its governance.

“This is one of the few companies to be the subject of two short reports within a relatively short time period,” said Oddo BHF analyst Geoffroy Michalet. This suggests “if major changes are not made and rendered public, the equity story could be weakened by reputational risk.”

Martin and his brother have direct stakes, but most of the clan’s holding is held through Analytical Bioventures SCA, which is based in Luxembourg and controlled by Gilles. He founded Eurofins in 1987 to check wine’s authenticity with a technology developed by his parents, according to the company’s website.

The company has been a rewarding investment since it went public. The stock has returned 23% annually since the 1997 initial public offering, compared with a 6.7% return for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.

--With assistance from Blaise Robinson, Tara Patel, Valentine Baldassari, James Cone, Michael Msika, Phil Serafino and Tom Maloney.

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