Press
Release
|
Source:
Ramius LLC
|
Ramius
Sends Letter to Orthofix Shareholders
Believes
Company Should Sell Blackstone Medical, Reduce Corporate Overhead, and Repay
Debt
Urges
Board to Take Immediate Action to Improve Shareholder Value Announces Intention
to
Solicit
Shareholder Support to Call a Special Meeting of Shareholders for the Purpose of
Replacing Up To Four Current Directors
Wednesday
December 3, 8:00 am ET
NEW
YORK--(BUSINESS WIRE)--Ramius LLC (“Ramius”) today announced that it has sent a
letter to the shareholders of Orthofix International N.V. (“Orthofix” or “the
Company”)(NASDAQ: OFIX - News), in which it
outlined several opportunities that Ramius believes would substantially increase
shareholder value and protect the long-term interests of shareholders. Ramius is
the beneficial owner of approximately 4.7% of the Company’s outstanding common
shares.
In the
letter, Ramius urged the Company to immediately engage a strategic advisor to
explore a sale or disposition of Blackstone Medical, take prompt action to
reduce corporate overhead expenses, and decrease the Company’s heavy debt load.
Ramius also expressed its intention to seek shareholder support to call a
special meeting for the purpose of making substantial changes to the composition
of the Board.
Jeffrey
C. Smith, a Partner at Ramius, stated, “Prior to the acquisition of Blackstone,
Orthofix was a healthy and debt-free company that had reasonable growth, strong
profits and substantial free cash flow. The acquisition of Blackstone has been a
failure. At this juncture, we believe it is imperative that the Board of
Orthofix take prompt action to sell Blackstone at the highest possible price and
reduce corporate overhead expenses. This will allow Orthofix to reduce debt and
position the Company for future success.”
Smith
added, “Given the Board’s failure to proactively address the Company’s issues
and material underperformance, we will also be seeking the support of
shareholders to call a special general meeting of shareholders. The purpose of
the meeting will be to replace up to four members of the current Board with
directors that have the appropriate skills and fortitude to implement changes
that will benefit all Orthofix shareholders.”
The full
text of the letter follows:
December
3, 2008
TO:
|
|
Shareholders
of Orthofix International N.V.
|
|
CC:
|
|
Mr.
James F. Gero (Chairman of the Board of Directors)
|
|
|
Mr.
Peter J. Hewett (Deputy Chairman of the Board of
Directors)
|
|
|
Mr.
Jerry C. Benjamin (Director)
|
|
|
Mr.
Charles W. Federico (Director)
|
|
|
Dr.
Guy J. Jordan, Ph.D. (Director)
|
|
|
Mr.
Thomas J. Kester, CPA (Director)
|
|
|
Ms.
Maria Sainz (Director)
|
|
|
Dr.
Walter P. von Wartburg (Director)
|
|
|
Mr.
Kenneth R. Weisshaar (Director)
|
|
|
|
Mr.
Alan Milinazzo (President and Chief Executive Officer,
Director)
|
|
|
Mr.
Robert Vaters (Executive Vice President and Chief Financial
Officer)
|
Fellow
shareholder:
Ramius,
together with its affiliates, currently owns 4.7% of the outstanding common
stock of Orthofix International N.V. (“Orthofix” or “the Company”), making us
one of the largest shareholders of the Company. Over the past several months, we
have conducted extensive research on Orthofix, including several meetings and
conference calls with Alan Milinazzo, Bob Vaters, and Dan Yarborough. We have
also conducted an in-depth review of the broader orthopedics industry to better
understand the opportunities and challenges that Orthofix faces.
Based on
our findings, we believe there is a tremendous opportunity at Orthofix to
substantially increase shareholder value and to protect the long-term interests
of shareholders. We believe, as described more fully in this letter, that
Orthofix shares could be worth in excess of $25 per share or a 117% increase
above the current price, if our suggestions are implemented in an expeditious
manner. The core businesses at Orthofix, including Orthofix Domestic, Orthofix
International, and Breg, continue to perform well, generating reasonable growth,
solid earnings, and strong free cash flow. However, Orthofix faces several major
challenges, primarily resulting from the acquisition of Blackstone Medical
(“Blackstone”) in August 2006 for $333 million. Despite heavy investments of
capital and resources into Blackstone, operating performance has declined
precipitously to a level where Blackstone now generates material operating
losses and negative free cash flow. In our opinion, the acquisition was a
failure from the outset. We believe management and the Board of Directors failed
to address critical risk factors during due diligence, failed to implement and
execute a viable operating plan, and, in light of the recent restructuring
announcement, have once again failed to take sufficient action. Worse yet, the
acquisition of Blackstone saddled Orthofix with a heavy debt load which has now
put the Company in a precarious position. The recently announced, costly
amendment to the term loan only provides some covenant leniency for the
short-term. The covenants tighten quickly in late 2009, requiring significant
improvement in EBITDA or substantial reductions in total debt. Therefore, prompt
action must be taken now to protect all shareholders and ensure a bright future
for Orthofix.
At this
juncture, we believe it is incumbent upon the Board of Directors of Orthofix to
immediately engage a strategic advisor to explore and execute a sale or
disposition of Blackstone at the highest possible price. A sale of Blackstone
would dramatically improve consolidated earnings and free cash flow, enabling
the Company to begin reducing the heavy debt load and ensuring compliance with
the stringent financial covenants that the recent bank amendment imposes upon
the Company. In addition to executing a sale of Blackstone, we believe the
Company must also re-assess corporate overhead expenses which have grown by more
than three times since the acquisition of Blackstone.
Given the
significant fundamental underperformance of Orthofix, which has led to an 80%
decline in the stock price this year and a 71% decline in the stock price since
the acquisition of Blackstone Medical on August 10, 2006, we are shocked that
the Board of Directors has not taken more proactive measures to address these
key issues. Management and the Board of Directors have had ample opportunity
over the past two years to remedy the ongoing issues at Blackstone, atone for
their mistakes, and take action to address the material underperformance. In our
opinion, they have failed time and time again. The current management team and
Board of Directors have put the future of Orthofix in jeopardy due to a
highly-levered balance sheet and the continued deterioration of Blackstone. At
this time, we feel it is appropriate for shareholders to take action to make
substantial changes to the composition of the Board of Directors. Fortunately,
corporate governance provisions in the Dutch Antilles, the governing body for
Orthofix, allow shareholders to make changes to the Board. We intend to ask you
for your support in the short term to make these changes by calling a special
general meeting of shareholders.
The Problem: Blackstone
Medical
“I think really here it’s worth
considering that this (Blackstone) is an acquisition that is done for growth.” –
Alan Milinazzo, President and CEO (August 7, 2006 Investor
Call)
Clearly,
the acquisition of Blackstone Medical has not panned out as management had
forecasted. At the time of the acquisition, Blackstone was operating at a
revenue run rate of $88 million per year and an operating income run rate of
$7.6 million per year. Management projected that the Blackstone acquisition,
together with the slower-growing spine stimulation business, would generate
revenue growth in excess of 25% per year and would continue to improve
profitability. In stark contrast to these projections, Blackstone’s last quarter
revenue declined 15.3%
year-over-year and the last quarter operating loss, adjusted for the goodwill
impairment and inventory charges, was a loss of $8.8 million. In comparison to
these results, the broader spine industry continues to grow at double-digit
rates in spite of a weakening economy, presumably due to the non-elective and
fully-reimbursable nature of the procedures. The failures at Blackstone are, in
our opinion, entirely Blackstone specific. In fact, as of the last quarter’s
results, Orthofix had written down the carrying value of its investment in
Blackstone, originally $333 million, by 93% to $23.5 million.
It
appears to us that, even from the outset, the Blackstone acquisition was
ill-conceived. On the conference call announcing the acquisition of Blackstone
on August 7, 2006, management asserted:
“We expect the acquisition to be
accretive to non-GAAP cash earnings in 2007. Additionally, we expect it to be
accretive to earnings on a GAAP basis, beginning in 2008, and to be
substantially accretive to GAAP earnings in subsequent
years.”
However,
based on our internal analysis shown below, we fail to see how reasonable
assumptions at the time of the acquisition would have yielded results in line
with management’s expectations for positive earnings contributions in 2008 and
beyond. As you can see below, Blackstone would have needed to generate revenue
growth of 94% per year just to break even on an earnings basis in 2008. Even if
we give management credit for substantial operating margin improvements of 200
basis points per year, revenue growth would still have had to have been over 60%
per year. These growth rates are far higher than the three-year historical
growth rate of 40% for Blackstone prior to its acquisition by Orthofix. The only
possible explanation as to how management could have reached the conclusion that
Blackstone would be accretive by 2008 is if the Company had successfully
completed a lower-cost financing using equity or convertible notes in order to
reduce interest expense. We believe this assumption was highly irresponsible and
should never have been approved by the Board.
Revenue Growth / Operating Margin
Needed for Blackstone Acquisition to be Breakeven in
2008
|
|
As
of Closing
|
|
|
2007
|
|
|
2008
|
|
Amortization
of Intangible Assets (1)
|
|
$ |
9.3 |
|
|
$ |
9.3 |
|
|
$ |
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Debt
|
|
$ |
330.0 |
|
|
$ |
330.0 |
|
|
$ |
300.0 |
|
Debt
Paydown (2)
|
|
$ |
0.0 |
|
|
$ |
(30.0 |
) |
|
$ |
(30.0 |
) |
Closing
Debt
|
|
$ |
330.0 |
|
|
$ |
300.0 |
|
|
$ |
270.0 |
|
Interest
Rate
(3)
|
|
|
7.1 |
% |
|
|
7.1 |
% |
|
|
7.1 |
% |
Interest
Expense
|
|
$ |
23.5 |
|
|
$ |
21.4 |
|
|
$ |
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Pre-Tax Acquisition Costs
|
|
$ |
32.8 |
|
|
$ |
30.7 |
|
|
$ |
28.5 |
|
|
|
Run
Rate
|
|
Constant
Op. Margin
|
|
Improving
Op. Margin
|
|
Actual
Revenue
|
|
|
|
as
of Closing
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
'05-'07
|
|
LTM
|
Revenue
|
|
$ |
88.0 |
|
|
$ |
170.5 |
|
|
$ |
330.3 |
|
|
$ |
140.9 |
|
|
$ |
225.7 |
|
|
|
|
|
$ |
110.8 |
|
Revenue
Growth Needed to Breakeven in 2008
|
|
|
|
|
|
|
93.7 |
% |
|
|
93.7 |
% |
|
|
60.2 |
% |
|
|
60.2 |
% |
|
|
|
|
|
|
|
Actual
Revenue Growth
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.0 |
% |
|
|
-2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
7.6 |
|
|
$ |
14.7 |
|
|
$ |
28.5 |
|
|
$ |
15.0 |
|
|
$ |
28.5 |
|
|
|
|
|
|
|
|
|
Operating
Margin
|
|
|
8.6 |
% |
|
|
8.6 |
% |
|
|
8.6 |
% |
|
|
10.6 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
/ Dilution
|
|
$ |
(25.2 |
) |
|
$ |
(15.9 |
) |
|
$ |
0.0 |
|
|
$ |
(15.7 |
) |
|
$ |
0.0 |
|
|
|
|
|
|
|
|
|
|
|
(1)
estimated as total 2007 amortization of intangibles less 2006 total
amortization of intangibles.
|
(2)
Assumption based on projected free cash flow available for debt
paydown.
|
(3)
Interest rate on Term Loan disclosed in 2006 10-K.
|
(4)
'05-'07 actual revenue growth is the compounded annual growth rate from
2005 to 2007. 2005 revenue of $60 million per 8/7/06
transcript.
|
Almost
from the start, the acquisition of Blackstone was plagued with problems.
Although Blackstone performed well for several quarters following the closing of
the transaction, in the middle of 2007 things began to deteriorate. In July
2007, Blackstone received a subpoena issued by the Department of Health and
Human Services, Office of the Inspector General (“OIG”), under the authority of
the federal healthcare anti-kickback and false claims statutes. A year and a
half later, this issue has yet to be resolved and remains a major overhang on
the business. Not long after the OIG issue came to light, in the fourth quarter
of 2007, the Lyons Brothers, who founded Blackstone and who agreed to remain
with the Company after closing, left the Company. This was a surprising
development given management’s statement on the August 7, 2006 conference call
announcing the transaction:
“Also and importantly all three
Lyons Brothers who founded the Company have agreed to stay on with the combined
organization.”
The Lyons
Brothers departure from the Company initiated a slew of departures from
Blackstone, including key internal people in research and development and sales
and marketing, as well as several key outside distributors. The Company then
began a painful process of restructuring the Blackstone distribution network
from one that was historically 100% third-party distributors to a hybrid model
including both indirect sales representatives as well as a team of direct sales
representatives that were hired at an additional expense of over $5 million per
year. Due to the poor performance, these representatives have subsequently been
fired or moved to other responsibilities within the Company.
Beginning
in late 2007, the operating performance of Blackstone began deteriorating
quickly. As you can see in the table below, in spite of heavy investments in
working capital and capital expenditures, operating performance has deteriorated
almost every quarter since the fourth quarter of 2007. Capital expenditures at
Blackstone alone totaled more than $15 million for 2007, representing over 80%
of total capital spending for the entire Orthofix business even though it
represented less than 25% of total revenues.
Blackstone Revenue and Operating
Income
|
|
4Q07(1) |
|
1Q08 |
|
2Q08 |
|
3Q08(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone
Revenue
|
|
$ |
34.1 |
|
|
$ |
29.5 |
|
|
$ |
28.0 |
|
|
$ |
25.8 |
|
Revenue
Growth - %
|
|
|
18.1 |
% |
|
|
11.1 |
% |
|
|
-9.0 |
% |
|
|
-15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
(4.0 |
) |
|
$ |
(3.7 |
) |
|
$ |
(7.0 |
) |
|
$ |
(8.8 |
) |
Operating
Margin - %
|
|
|
-11.8 |
% |
|
|
-12.5 |
% |
|
|
-25.0 |
% |
|
|
-34.1 |
% |
(1)
Operating income adjusted for $20 million write-down of
Blackstone.
|
(2)
Operating income adjusted for $289.5 million write-down of Blackstone and
$10.9 million inventory adjustment.
|
In May
2008, Blackstone took another hit when a key competitor, NuVasive Inc. (NUVA),
announced the acquisition of the Osteocel business unit from Osiris Therapeutics
Inc. (OSIR). Blackstone is currently the exclusive distributor of Osteocel’s key
product, Trinity, a biological spine implant using adult stem cells. The Trinity
product has been credited with most of the growth in Blackstone’s biologics
business historically. However, the distribution agreement terminates in 2009
and Blackstone will no longer be able to distribute the Trinity product. The
Trinity product has been a key differentiator for Blackstone. This major setback
could have been avoided had the Company identified this risk factor during the
due diligence process and addressed the issue through the creative structuring
of an earn-out payment based on the successful renewal of the distribution
agreement or a re-negotiation of a longer-term contract with Osiris prior to
closing.
In order
to address this substantial issue, in August 2008, the Company announced a
collaboration agreement with the Musculoskeletal Transplant Foundation (“MTF”)
to develop a stem cell-based allograft to compete head-to-head with Trinity. As
part of this arrangement, Orthofix agreed to pay $10 million to fund the ongoing
product development, yet more money out of shareholders’ pockets. Although
management has stated that they expect the MTF product to be available for
commercial sales in mid-2009, industry experts are highly skeptical. Even if it
is available in mid-2009, the lack of clinical data and physician support for
the MTF product will, in our opinion, make it extremely difficult to generate
any meaningful sales before 2010.
Clearly
acknowledging that Blackstone was headed very quickly in the wrong direction,
the Company announced on August 28, 2008 that Brad Mason, President of Breg, was
named the new President of Blackstone, replacing Oliver Burckhardt.
Additionally, with the latest earnings report, the Company announced several
restructuring initiatives for Blackstone. As it was explained on the third
quarter earnings call, the restructuring plan centers around two objectives. The
first is shifting Blackstone onto an Oracle platform and the second is
consolidating the two Blackstone facilities in Massachusetts and New Jersey into
one, yet to be constructed, facility in Texas. The expected cash cost of the
restructuring is $4.2 million between 2008 and 2009 and is expected to yield
savings of $2 million in 2010 and $5 million in 2011 and beyond. These savings
compare to the nearly $8.8 million of negative operating income last quarter
which equates to negative $35.2 million on an annualized basis.
As the
chart below demonstrates, management is once again counting on significant
growth to achieve breakeven results at Blackstone. Including the full impact of
the announced restructuring initiatives and the savings from firing the direct
sales force, we estimate Blackstone would have to grow 35% from the last quarter
run rate without increasing operating costs in order to just break even.
Remember that the initial objective as outlined by management was a transaction
that would be accretive after taking into account interest expense and
amortization of purchased intangibles. In order for Blackstone to achieve that
hurdle, revenue would have to grow 84%. Let us remind you that Blackstone’s
sales were down 15.3% last quarter.
Revenue
Growth Needed to Achieve Breakeven / Accretion under Current Restructuring
Plan
|
|
Breakeven
|
|
|
Accretive
|
|
Last
Quarter Operating Income Run Rate (1)
|
|
$ |
(35.2 |
) |
|
$ |
(35.2 |
) |
Cost
Savings from Firing Direct Sales Force
|
|
$ |
5.0 |
|
|
$ |
5.0 |
|
Cost
Savings from Restructuring
|
|
$ |
5.0 |
|
|
$ |
5.0 |
|
Operating
Income Pro Forma for Restructuring
|
|
$ |
(25.2 |
) |
|
$ |
(25.2 |
) |
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
$ |
(26.0 |
) |
Amortization
of Intangible Assets
|
|
|
|
|
|
$ |
(9.3 |
) |
Total
Transaction Costs
|
|
|
|
|
|
$ |
(35.3 |
) |
|
|
|
|
|
|
|
|
|
Operating
Income plus Transaction Costs
|
|
$ |
(25.2 |
) |
|
$ |
(60.5 |
) |
|
|
|
|
|
|
|
|
|
Additional
Gross Profit Required Assuming Flat Operating Costs
|
|
$ |
25.2 |
|
|
$ |
60.5 |
|
Estimated
Gross Margin (2)
|
|
|
70.0 |
% |
|
|
70.0 |
% |
Incremental
Revenue Needed to Breakeven
|
|
$ |
36.0 |
|
|
$ |
86.4 |
|
|
|
|
|
|
|
|
|
|
Last
Quarter Revenue Run Rate (1)
|
|
$ |
103.2 |
|
|
$ |
103.2 |
|
Revenue
Level to Achieve Breakeven with Current Restructuring Plan
|
|
$ |
139.2 |
|
|
$ |
189.6 |
|
Required
Revenue Growth
|
|
|
34.9 |
% |
|
|
83.8 |
% |
(1)
Run rate calculated as Q308 results multiplied by 4.
|
(2)
Per 11/06/08 conference call where management stated Blackstone gross
margin was currently below 70%.
|
Based on
the issues we have highlighted above, we have strong doubts about the Board’s
oversight of the Blackstone acquisition from its inception through the most
recently announced restructuring initiatives. Management and the Board’s failure
to execute at Blackstone have put the entire Company at risk due to the material
operating losses at Blackstone and the debt-laden balance sheet.
The Solution: Orthofix
Domestic, Orthofix International, and Breg
“In summary, as a result of strong
sales performance in these legacy businesses, we have delivered approximately
16% revenue growth on 73% of our total year-to-date revenue.” – Alan Milinazzo,
President and CEO (November 6, 2008 Investor Call)
Prior to
the acquisition of Blackstone, Orthofix was a healthy and debt-free company
focused on a variety of niche markets within orthopedics that allowed the
Company to generate reasonable growth, healthy profits, and substantial free
cash flow. Although the results at Blackstone have negatively impacted
consolidated revenue, earnings, and cash flow, the legacy businesses continue to
perform well. As you can see in the table below, Orthofix Domestic, Orthofix
International, and Breg combined generated last twelve months revenues of $405.4
million, an increase of 8.3% over the prior year period. We estimate these
businesses also generated last twelve months EBITDA of $107.2 million before
corporate expenses, representing a 26.4% margin on sales. These are good
businesses.
Pre-Corporate
Revenue and EBITDA Excluding Blackstone
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
LTM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orthofix
Domestic
|
|
Revenue
|
|
$ |
135.0 |
|
|
$ |
154.7 |
|
|
$ |
166.7 |
|
|
$ |
182.4 |
|
|
|
Revenue
Growth - %
|
|
NA
|
|
|
|
14.5 |
% |
|
|
7.8 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
37.5 |
|
|
$ |
39.5 |
|
|
$ |
58.1 |
|
|
$ |
63.2 |
|
|
|
EBITDA
Margin - %
|
|
|
27.8 |
% |
|
|
25.5 |
% |
|
|
34.9 |
% |
|
|
34.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breg
|
|
Revenue
|
|
$ |
72.0 |
|
|
$ |
76.2 |
|
|
$ |
83.4 |
|
|
$ |
88.2 |
|
|
|
Revenue
Growth - %
|
|
NA
|
|
|
|
5.8 |
% |
|
|
9.4 |
% |
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
15.9 |
|
|
$ |
14.4 |
|
|
$ |
17.8 |
|
|
$ |
21.0 |
|
|
|
EBITDA
Margin - %
|
|
|
22.0 |
% |
|
|
18.9 |
% |
|
|
21.3 |
% |
|
|
23.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orthofix
International
|
|
Revenue
|
|
$ |
106.2 |
|
|
$ |
108.4 |
|
|
$ |
124.3 |
|
|
$ |
134.8 |
|
|
|
Revenue
Growth - %
|
|
NA
|
|
|
|
2.1 |
% |
|
|
14.6 |
% |
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
28.7 |
|
|
$ |
22.0 |
|
|
$ |
23.5 |
|
|
$ |
23.0 |
|
|
|
EBITDA
Margin - %
|
|
|
27.0 |
% |
|
|
20.3 |
% |
|
|
18.9 |
% |
|
|
17.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Revenue
|
|
$ |
313.3 |
|
|
$ |
339.3 |
|
|
$ |
374.4 |
|
|
$ |
405.4 |
|
|
|
Revenue
Growth - %
|
|
NA
|
|
|
|
8.3 |
% |
|
|
10.3 |
% |
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
82.1 |
|
|
$ |
75.9 |
|
|
$ |
99.4 |
|
|
$ |
107.2 |
|
|
|
EBITDA
Margin - %
|
|
|
26.2 |
% |
|
|
22.4 |
% |
|
|
26.5 |
% |
|
|
26.4 |
% |
(1)
Segment revenue excludes inter-company revenues.
|
(2)
Segment D&A is estimated based on 2007 reported segment
D&A.
|
It is
also important to note that these legacy businesses require minimal working
capital and capital expenditures, therefore enabling them to generate
substantial free cash flow. This is best demonstrated by the Company’s ability
to have paid down the $110 million of debt used to purchase Breg in 2003 in less
than two years.
Based on
our industry research, we expect Orthofix Domestic, Orthofix International, and
Breg to continue generating solid results with growth in excess of the
respective market growth rates. The market leadership positions in spine and
long-bone stimulation, fixation, and sports medicine deserve the full attention
of management and the Board of Directors, without distraction from Blackstone.
These businesses are the future of Orthofix.
Next Steps: Sell Blackstone,
Reduce Corporate Overhead, and Pay Down Debt
Before
engaging in a lengthy restructuring process that brings additional cost and
substantial risk to Orthofix shareholders, we urge the Board to immediately
engage a strategic advisor to explore and execute a sale of Blackstone at the
highest possible price. Although some would argue that Blackstone is not
saleable in its current form, we firmly disagree. Every asset has a price and,
even in today’s market, we believe Blackstone could be sold for a value between
0.5x and 1.0x revenues or more. Over the past two years, Blackstone has been
heavily investing in inventory and capital spending primarily to build tool sets
for use with the core portfolio of metal-based products. Given the installed
base of tool sets and substantial inventories, we believe, that at a minimum, an
acquirer would be willing to pay for these assets, which we estimate at $50
million or more. In addition to these valuable assets, Blackstone has also been
investing in new product development with products set for release in
2009.
Even if
values come in below these expectations, we believe it makes sense for Orthofix
to sell Blackstone at the highest price it can achieve in today’s market. In
order to address the ongoing liability created by the OIG investigation, a sale
of Blackstone could be structured as an asset purchase with the OIG liability
remaining with Orthofix. Any further fines or penalties ascribed by the OIG
would presumably be offset by funds from the $50 million of cash in escrow from
when Orthofix acquired Blackstone.
In
addition to immediately exploring a sale of Blackstone, management and the Board
must also take prompt action to reduce corporate overhead expenses. Corporate
overhead was $10.2 million for the twelve-month period preceding the acquisition
of Blackstone. For the last twelve months, this number has ballooned to over $20
million, even when excluding certain one-time items. We believe this bloated
cost structure has been driven by, among other things, the highly distributed
nature of the Company. As it stands today, the executive offices are located in
what is arguably some of the most expensive real estate in Boston, a city where
the Company has no other business purpose. The legal, finance, and accounting
groups are located in North Carolina. The recently appointed President of
Blackstone, who is also the President of North America, is located in San Diego
while some of the key manufacturing facilities are located in Texas. This highly
distributed infrastructure is neither efficient nor cost effective, and should
be remedied immediately.
Taking
swift action to sell Blackstone and reduce corporate overhead expenses is
critical, especially in light of the current market conditions. Given the state
of the credit and equity markets, the Company cannot count on its ability to
refinance its debt or raise additional capital. The actions we have highlighted
above will position Orthofix well to begin the task of reducing the heavy debt
load. The recently announced amendment to the term loan covenants provide
Orthofix with leniency on the key Total Debt / EBITDA covenant, however,
beginning in the third quarter of 2009, this covenant begins to tighten quickly,
requiring significant debt reductions or dramatically improved EBITDA. As you
can see in the table below, Orthofix must either achieve 2009 EBITDA of $91.7
million versus LTM EBITDA of $81.3 million or reduce debt by $33.6 million, or a
combination of the two, in order to remain in compliance with the tightening
covenants. For 2010, Orthofix must either achieve EBITDA of $119.2 million or
reduce debt by $94.6 million, or a combination of the two, in order to remain in
compliance. These hurdles will be challenging to overcome, but with prompt
action to sell Blackstone, we believe Orthofix can meet these requirements
without raising additional capital. The currently proposed, Board adopted,
17-month restructuring initiative at Blackstone that yields $5 million of total
cost savings in 2011 does little to remedy this situation.
Total
Debt / EBITDA Covenant Analysis
|
|
|
|
Current
Debt
|
|
$ |
297.9 |
|
LTM
EBITDA
|
|
$ |
81.3 |
|
LTM
Total Debt / EBITDA Ratio
|
|
|
3.66 |
x |
Trigger
Date
|
|
Metric
|
|
|
EBITDA
Required
to
Meet Covenant
|
|
|
Debt
Pay Down To
Meet Covenant
|
|
06/30/09
|
|
|
4.00 |
x |
|
$ |
74.5 |
|
|
NM
|
|
09/30/09
|
|
|
3.50 |
x |
|
$ |
85.1 |
|
|
$ |
13.2 |
|
12/31/09
|
|
|
3.25 |
x |
|
$ |
91.7 |
|
|
$ |
33.6 |
|
03/31/10
|
|
|
2.85 |
x |
|
$ |
104.5 |
|
|
$ |
66.1 |
|
06/30/10
|
|
|
2.75 |
x |
|
$ |
108.3 |
|
|
$ |
74.2 |
|
Thereafter
|
|
|
2.50 |
x |
|
$ |
119.2 |
|
|
$ |
94.6 |
|
Taking
these actions will ensure that Orthofix will remain in compliance with the
stringent debt covenants. The proceeds from a sale of Blackstone will likely not
be enough to pay down the term loan in its entirety. However, the Blackstone
acquisition was clearly a bad mistake. The ongoing losses at Blackstone continue
to compound the mistake. Therefore, it is critical to sell the business, use the
proceeds to repay a portion of the debt, reduce interest costs, and cut the
losses. The ongoing cash flow from the legacy businesses would provide
sufficient cash to further reduce debt and meet obligations. Given the highly
depressed value of Orthofix stock, it is unacceptable for management and the
Board to consider highly dilutive equity or convertible issuances to accelerate
debt reductions when other, non-dilutive options are available.
Pro Forma
Valuation
Orthofix
shareholders would greatly benefit from the implementation of the initiatives we
have highlighted above. As you can see in the table below, even using a
conservative estimate for the value of Blackstone in a sale, a conservative
multiple for the legacy businesses, and only giving credit for half of the
potential corporate overhead savings, we believe Orthofix shares would be worth
more than $25 per share, a 117% increase from the current price of
$11.66.
Valuation
Summary
|
|
Valuation
Matrix
|
|
|
|
LTM
EBITDA
|
|
|
|
|
|
|
EBITDA
Multiple on Core Businesses
|
|
Orthofix
Domestic
|
|
$ |
63.2 |
|
|
|
|
|
|
|
6.0 |
x |
|
|
6.5 |
x |
|
|
7.0 |
x |
|
|
7.5 |
x |
|
|
8.0 |
x |
Breg
|
|
$ |
21.0 |
|
Revenue
Multiple on Blackstone Sale
|
|
|
0.0 |
x |
|
$ |
16.49 |
|
|
$ |
19.19 |
|
|
$ |
21.88 |
|
|
$ |
24.58 |
|
|
$ |
27.27 |
|
International
|
|
$ |
23.0 |
|
|
|
0.5 |
x |
|
$ |
19.93 |
|
|
$ |
22.62 |
|
|
$ |
25.31 |
|
|
$ |
28.01 |
|
|
$ |
30.70 |
|
Corporate
(1)
|
|
$ |
(15.0 |
) |
|
|
|
1.0 |
x |
|
$ |
23.36 |
|
|
$ |
26.05 |
|
|
$ |
28.75 |
|
|
$ |
31.44 |
|
|
$ |
34.14 |
|
Total
EBITDA (ex-Blackstone)
|
|
$ |
92.2 |
|
|
|
|
1.5 |
x |
|
$ |
26.79 |
|
|
$ |
29.48 |
|
|
$ |
32.18 |
|
|
$ |
34.87 |
|
|
$ |
37.57 |
|
Low-End
of LTM Peer Multiples (2)
|
|
|
7.0 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
Value for Core Businesses
|
|
$ |
645.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone
LTM Revenue
|
|
$ |
117.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Multiple
|
|
|
0.5 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
for Blackstone in a Sale
|
|
$ |
58.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Enterprise Value
|
|
$ |
703.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus:
Cash
|
|
$ |
27.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Debt
|
|
$ |
(297.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Capitalization
|
|
$ |
432.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
17.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma Stock Price
|
|
$ |
25.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Stock Price
|
|
$ |
11.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Return
|
|
|
117.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Estimated based on $5 million of cost reductions related to sale of
Blackstone.
|
(2)
Peer group includes: CNMD, KNSY, SN, SYK, SYST, TFX, WMGI,
SMH.
|
As we
have clearly demonstrated above, there is a substantial opportunity to
immediately improve value for shareholders as well as to preserve the long-term
financial solvency of Orthofix.
Shareholder
Action
Under the
rules of the Dutch Antilles, shareholders who hold at least 10% of the voting
power may request that the management or the Board convene a special general
meeting of shareholders in order to conduct business they believe to be in the
best interest of Orthofix shareholders. To that end, we intend to mail to
shareholders a solicitation statement and accompanying request card seeking your
support to have the Company call a special general meeting of shareholders. If
we are successful in our solicitation of written requests to call the special
general meeting of shareholders, we expect to present at the special general
meeting a proposal to remove up to four members of the current Board of
Directors and to replace them with director candidates that have the appropriate
skills and fortitude to implement significant changes for the benefit of all
Orthofix shareholders.
Even
though we are already moving forward with these actions, we welcome an open
dialogue with the current Board of Directors. Our sincere hope is that the
current Board will take a fresh look at the options we have outlined above and
immediately take action. As significant shareholders of Orthofix, our objective
is to see the full value of our shares recognized in the marketplace. We will
work on behalf of all shareholders to ensure that our interests are represented
in the board room.
We thank
you for your consideration and would greatly appreciate your
support.
Best
Regards,
|
|
/s/
|
/s/
|
Jeffrey
C. Smith
|
Peter
A. Feld
|
Partner
|
Managing
Director
|
Ramius
LLC
|
Ramius
LLC
|
About Ramius LLC
Ramius
LLC is a registered investment advisor that manages assets in a variety of
alternative investment strategies. Ramius LLC is headquartered in New York with
offices located in London, Tokyo, Hong Kong, Munich, and Vienna.
CERTAIN INFORMATION CONCERNING
PARTICIPANTS
Ramius
Value and Opportunity Master Fund Ltd (“Value and Opportunity Master Fund”),
together with the other participants named herein, intends to make a preliminary
filing with the Securities and Exchange Commission (“SEC”) of a solicitation
statement and an accompanying request form to be used to solicit written
requests from shareholders of Orthofix International N.V., a limited liability
company organized under the laws of the Netherlands Antilles (the “Company”), to
call a special general meeting of the Company for the purpose of seeking to
remove and replace certain directors of the Company.
If
successful in their solicitation of written requests to call the special general
meeting, the participants intend to file and disseminate a separate proxy
statement and proxy card relating to proposals to be voted upon at the special
general meeting.
VALUE AND
OPPORTUNITY MASTER FUND ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE
SOLICITATION STATEMENT AND ANY OTHER SOLICITATION MATERIALS AS THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH SOLICITATION
MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV.
IN ADDITION, THE PARTICIPANTS IN THIS SOLICITATION WILL PROVIDE COPIES OF THE
SOLICITATION STATEMENT WITHOUT CHARGE UPON REQUEST. REQUESTS FOR COPIES SHOULD
BE DIRECTED TO THE PARTICIPANTS SOLICITOR.
The
participants in the proxy solicitation are Value and Opportunity Master Fund,
Ramius Enterprise Master Fund Ltd (“Enterprise Master Fund”), Ramius Advisors,
LLC (“Ramius Advisors”), RCG Starboard Advisors, LLC (“RCG Starboard Advisors”),
Ramius LLC (“Ramius”), C4S & Co., L.L.C. (“C4S”), Peter A. Cohen (“Mr.
Cohen”), Morgan B. Stark (“Mr. Stark”), Thomas W. Strauss (“Mr. Strauss”) and
Jeffrey M. Solomon (“Mr. Solomon”).
As of the
date of this filing, Value and Opportunity Master Fund beneficially owns 716,377
shares of Common Stock of the Company. RCG Starboard Advisors, as the investment
manager of Value and Opportunity Master Fund, is deemed to be the beneficial
owner of the 716,377 shares of Common Stock of the Company owned by Value and
Opportunity Master Fund.
As of the
date of this filing, Enterprise Master Fund beneficially owns 87,303 shares of
Common Stock of the Company. Ramius Advisors, as the investment advisor of
Enterprise Master Fund, is deemed to be the beneficial owner of the 87,303
shares of Common Stock of the Company owned by Enterprise Master
Fund.
Ramius,
as the sole member of each of RCG Starboard Advisors and Ramius Advisors, C4S,
as the managing member of Ramius, and Messrs. Cohen, Stark, Strauss and Solomon,
as the managing members of C4S, are each deemed to be the beneficial owners of
the 716,377 shares of Common Stock of the Company owned by Value and Opportunity
Master Fund and the 87,303 shares of Common Stock of the Company owned by
Enterprise Master Fund. Messrs. Cohen, Stark, Strauss and Solomon share voting
and dispositive power with respect to the shares of Common Stock of the Company
owned by Value and Opportunity Master Fund and Enterprise Master Fund by virtue
of their shared authority to vote and dispose of such shares of Common
Stock.
For the
purposes of Rule 13d-5(b)(1) of the Securities Exchange Act of 1934, as amended,
each of the participants in this solicitation is deemed to beneficially own the
shares of Common Stock of the Company beneficially owned in the aggregate by the
other participants. Each of the participants in this proxy solicitation
disclaims beneficial ownership of such shares of Common Stock except to the
extent of his or its pecuniary interest therein.
Contact:
Media
& Shareholders:
Sard
Verbinnen & Co.
Dan
Gagnier or Renée Soto, 212-687-8080
Source:
Ramius LLC