Jehoshaphat Research disclosed that it has established a short position in GPGI (NYSE:GPGI), an industrial conglomerate with a market capitalization of $7 billion, citing significant concerns about the accounting around GPGI's recent acquisition of Husky Technologies. The research firm published its analytical thesis on its website and noted market reaction, saying GPGI shares rose 1.6% following the publication.
At the center of Jehoshaphat Research's critique is the assertion that Husky Technologies accounts for more than 70% of the pro forma company's EBITDA. The firm argues that Husky's free cash flow is exaggerated by 90% and that GPGI is conflating different formulations of free cash flow in a way that makes future cash-flow projections appear achievable. Beyond free cash flow, the research note states that reported revenue, Adjusted EBITDA and other major financial metrics are also influenced by the accounting treatments under scrutiny.
The report also details management upheaval at Husky, saying the acquired company's CEO and CFO both resigned last week, each citing personal reasons. Jehoshaphat Research points out that neither executive had an identified replacement, which the firm interprets as indicative that the departures were unexpected by GPGI.
Former Husky employees, according to the research note, described accounting practices the firm characterized as aggressive prior to the acquisition. One example cited was shipments of product to a company parking lot used to support revenue recognition. Jehoshaphat Research presents that description as evidence of historical revenue-recognition practices that warrant further scrutiny.
The note also raises potential related-party concerns. Jehoshaphat Research reports that GPGI pays management fees to another publicly traded company controlled by the family of GPGI's chairman, and that these fees increase in connection with acquisitions. The conglomerate completed the acquisition of Husky Technologies last month after what the research firm describes as a relatively brief due diligence period.
On shareholder and lockup terms, Jehoshaphat Research said the private equity seller that sold Husky to GPGI obtained a reduced lockup on 55 million GPGI shares. The research firm further noted that recent PIPE investors are subject to no lockups and therefore could sell shares at current market prices. In its valuation commentary, Jehoshaphat Research states that GPGI trades at a premium to its sum-of-the-parts valuation.
Takeaway: The research firm's short position centers on alleged overstatements of Husky's free cash flow and other financial metrics, governance and related-party fee questions, rapid due diligence, and share-sale mechanics that could increase near-term selling pressure. Market participants reacted with a modest uptick in GPGI shares immediately after the publication.