NOVA Novamed, Inc. (MM)

WEEHAWKEN, N.J., Jan. 24, 2011 /PRNewswire/ -- The following is a letter that the members of Noble Equity Capital Management, LLC sent to the board of Directors and management of NovaMed Inc. simultaneously with the issuance of this press release. Noble believes the agreed upon acquisition of NovaMed by Surgery Partners does not sufficiently reward shareholders for the full value of the company and will accordingly not be tendering its (and its affiliates) collective 1.6% ownership of the outstanding shares of NovaMed (NOVA).

To NovaMed Board & Officers:

On March 26 2010, we wrote to you and suggested that due to the languishing stock price at the time (10.44 post split), management and the board of directors should pursue strategic alternatives. While I commend your collective initiative to create shareholder value, in our view, the numbers show that this is not a good deal for long term shareholders.

While last week's press release (announcing the acquisition of NovaMed by Surgery Partners) states a transaction value of $214 million, by the time the deal closes in the second quarter of 2011, the company will likely pay down another $15-$20 million in debt, bringing the deal value below $200 million. Using the third Quarter of 2010 as a starting point, twelve month trailing EBITDA is approximately $30,5000,000. However, consensus estimates are for first half of 2011 earnings to be 10% higher than the previous year and our internal estimates are greater than consensus. By the time the deal closes, the EV/EBITDA takeout multiple will shrink from 7.0x at the end of 3Q:2010 to 6.0x at the end of 2Q:2011. In multiple conference calls over the past twelve months, Mr. Hall, Chairman and CEO of NovaMed, has made statements concerning takeout multiples for Ambulatory Surgery Center chains. On July 29, 2010 the CEO stated "And the chains, every time you looked at a chain, someone wanted ten times". On October 28, 2010 he stated that "folks are willing to bid north of seven times EBITDA to acquire". Publicly traded Amsurg (AMSG) trades at 8.4x trailing EBITDA (including non-controlling redeemable interests) without a takeover premium.

What is the disconnect in valuation? Why sell the company for an uninspiring multiple when admissions trends are bottoming? While the company's convertible debt has been a point of concern for investors, in reality, it gave the company four years worth of acquisitions at a 1% interest rate. The company will be able to pay off more than half of the note by the time it is due in 2012 and the stock, at today's stock price of 13.25, will be trading at an EV/EBITDA of approximately 5.0x. Many of the company's procedures will finally stop seeing a decline in reimbursement In addition, management decided in the second quarter of 2010 to dispose of its earnings dilutive bariatric marketing business, which will improve earnings going forward.  The company has also been picking up hospital partners of late, which should help to boost admissions. This is not a capital intensive business and has historically produced significant free cash flow. Finally, if the healthcare bill stands and coverage is mandated for everyone, this will give the company significant opportunities for over 30 million new customers in 2014.

For all of these reasons, we suggest that you reconsider the acquisition of NovaMed Inc. by Surgery Partners for $13.25 per share, as it significantly undervalues the long term prospects of this business. While we appreciate that a marketing process was conducted and the open communication you have had with us, we will not be tendering our collective 1.6% of shares outstanding for this transaction. We hope management and the board engage in fresh discussions on how to continue growing the company and add value for NovaMed shareholders.  

SOURCE Noble Equity Capital Management, LLC