Eurofins Scientific Board Independence ‘Could Be Enhanced,’ Report Says

(Bloomberg) -- Eurofins Scientific SE, the laboratory testing company under pressure from short sellers, now faces scrutiny for the independence of its board and the quality of its auditing.

The six-member board includes Gilles Martin, Eurofins’s chairman and chief executive officer; his wife, Valerie Hanote; and his brother Yves-Loic Martin, a setup that “could be enhanced,” according to a report by the accounting team at Exane BNP Paribas. Eurofins also has an unusual auditing arrangement, the analysts said, with global accounting firm PwC signing the company’s consolidated accounts but smaller auditors reviewing the books for many of its subsidiaries.

Eurofins Scientific Board Independence ‘Could Be Enhanced,’ Report Says

Excerpts of the Exane BNP Paribas report were seen by Bloomberg News. The report on accounting and corporate governance was produced for select clients, said Paul Schneider, the broker’s deputy head of research. The firm declined to provide a full copy of the report.

“We had considered that the lack of independence of the board reflected the fact that the company is quite young and family controlled,” wrote Catherine Giordan and Sarah Deans, accounting and valuation analysts at Exane BNP Paribas. “However, in view of the complexity of the group (high number of subsidiaries, acquisitions, leverage, intra-group transactions), we believe the current board structure could be enhanced.”

Share Slump

The report adds to the pressure on Eurofins. The company’s shares have slumped 37 percent from the record set in October 2017, and the decline picked up steam late last year as Morgan Stanley recommended selling the stock. A string of acquisitions are masking a slowdown in growth and have left the lab-testing provider with too much debt, the brokerage said. The company pushed back, saying the report was inaccurate.

Asked about the Exane BNP Paribas research, a Eurofins representative said by email that the company “can’t comment on these types of allegations.”

Skeptics are betting the stock has further to fall: A record 31 percent of the shares available for trading are out on loan, a proxy for the amount of stock that has been sold by short sellers, according to data compiled by IHS Markit Ltd.

The report only looks at Eurofins from a corporate governance and accounting perspective. Allen Wells, the Exane BNP Paribas analyst who follows the company, has an outperform rating on the stock. His price target is 425 euros, about 20 percent above where the shares are trading.

Gilles Martin founded Eurofins in 1987 in his hometown of Nantes, France, to market a technology created by his parents that helped ascertain the sugar content of wine. Eurofins moved its headquarters to Luxembourg in 2012, though its shares still trade on Euronext Paris.

The stock has been a huge winner for investors, returning 22 percent annually over the past 20 years, compared to 4.2 percent a year for the CAC 40 Index. The Martins owned 36 percent of Eurofins stock and controlled about 58 percent of the voting rights as of June 30, according to the company’s first-half 2018 financial report. Eurofins has a market value of about 6.2 billion euros ($7 billion).

The three board members who aren’t family members -- Fereshteh Pouchantchi, Stuart Anderson and Patrizia Luchetta -- serve on the audit and corporate governance committees. Yves-Loic Martin resigned from the audit committee in June 2017, according to the 2017 annual report.

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