Obrem Capital Management Issues Letter to MDS Management and Board of Directors
30 Ottobre 2008 - 5:01PM
PR Newswire (US)
NEW YORK, Oct. 30 /PRNewswire/ -- MDS Inc. 2700 Matheson Blvd. East
Suite 300, West Tower Mississauga, Ontario Canada L4W 4V9 MDS Inc.
Management and Board of Directors, c/o: John T. Mayberry, Chairman
of the Board Stephen P. DeFalco, Chief Executive Officer October
30, 2008 Dear Sirs and Madams: Obrem Capital Management, according
to MDS' ("the Company") public filings, is among MDS' five largest
shareholders. We acquired our stake in MDS because we believed the
Company's shares were significantly undervalued, and that the
Company's three distinct businesses were exposed to attractive end
markets with solid competitive positions. In Schedule 13Ds filed on
April 9, 2008, June 26, 2008, and July 29, 2008, and in subsequent
communications with members of management and the board of
directors of MDS, we expressed our view that shares of the Company
remained significantly undervalued, and that near-term steps should
be taken to create shareholder value. Specifically, we recommended:
(i) that MDS hire a financial adviser to review what valuations
could be achieved through the sale or spin-off of one or more of
its business units; (ii) that management pursue a significant share
repurchase program; and (iii) that members of management and the
board of directors increase their ownership of MDS stock to more
closely align their interests with those of other shareholders. We
have engaged in numerous discussions with Company leadership over
the past several months. Members of management and the board of
directors have always been accessible and willing to listen to our
views. They encouraged us to be patient, offering a compelling
narrative on the opportunities that lay ahead. They also indicated
they would take our recommendations under advisement, as they, too,
saw a large discrepancy between the intrinsic value of the
businesses and the then-prevailing trading price of MDS shares.
Despite the positive tone of our interactions with management and
the board of directors, we have been disappointed with the lack of
action in response to our recommendations. We have not seen
evidence of any strategic action taken to unlock value, and we have
yet to see a substantive buyback beyond the normal course issuer
bid. Moreover, we continue to be surprised that a management and
board of directors so confident in their strategy and business
outlook would choose to own so little stock, and would not purchase
additional shares at these rapidly declining prices. MDS' operating
results have also been quite disappointing. After a surprisingly
poor second quarter result, management explained that certain
unanticipated factors had caused the Company to perform below plan,
but that shareholders should expect an improvement in the second
half of the year. Following yet another disappointing result in the
third quarter, our confidence in management has eroded further, a
sentiment we believe is shared by other shareholders. Particularly
upsetting is the continued delay in the recovery of MDS Pharma
Services -- the Company now says that "another couple of
quarters"(1) are needed for improvements to take shape -- and that
management has lowered guidance twice since initially giving
forecasts in February. We believe that these poor results, the loss
of confidence in management's ability to execute, and the apparent
unwillingness of the board of directors to take
shareholder-friendly actions have caused the share price to drop to
levels not seen since the start of this decade, including the
period prior to present management assuming control in mid-2005.
And it is worth noting that the failure to turn around MDS Pharma
Services has taken place in an environment where other contract
research organizations have been reporting record profitability and
results. To be clear, we do not doubt the efforts and intentions of
CEO Stephen DeFalco. We believe Mr. Defalco is a genuine individual
who is trying to do what he believes is best for MDS.
Unfortunately, the Company's poor operating performance and, more
importantly, the extremely poor share price performance during his
three-year tenure speak for themselves, and indicate that a
different approach for creating shareholder value is needed. Action
must be taken before there is erosion in the intrinsic value of
MDS' assets. Remarkably, despite the poor execution and missed
opportunities of the past several quarters, we believe that MDS'
assets have retained their substantial value. Conversations with
industry experts, competitors, and investment bankers have given us
comfort that the Company's divisions are well-positioned in
attractive markets. Moreover, these conversations have given us
reason to believe that multiple strategic parties have a strong
interest in acquiring specific assets of the Company. Given the
strong likelihood that there are many interested parties, we would
like the board of directors to immediately engage one or more
reputable investment banking firms to help the Company explore
strategic alternatives, including divesting individual business
units. An active due diligence process for qualified buyers who
express credible interest should commence immediately. We believe
it would be highly inappropriate for the Company to ignore
prospective bids given the sizable gap that now exists between the
share price of MDS and the fair value of its assets. It would
likely be difficult to sell the entire Company to a single
strategic buyer for the simple reason that this collection of
assets does not belong together in the first instance. We do,
however, believe there are logical and well-funded buyers for the
various pieces of MDS. Our preference would be to see an
expeditious sale of some combination of the legacy Sciex business,
the Molecular Devices business, and the pieces of MDS Pharma
Services, followed by a spin-off of MDS Nordion. We strongly
believe this would unlock substantial value for shareholders and
allow any remaining entity to be re-positioned as a pure play
company with proper managerial focus and a more natural shareholder
base. Our belief is that the easiest group of assets to divest
would be those in MDS Analytical Technologies, which we think would
attract numerous potential buyers, including several who already
know the assets well. Given the disappointing operational results
and the destruction of shareholder value, we do not want to see the
Company spend additional shareholder capital. Specifically, we are
opposed to the Company expanding its footprint by acquiring the
other half of the Sciex joint venture. We believe this view is
shared by many of the Company's shareholders. Rather, we believe
that shrinking the enterprise via appropriate sales of businesses
will maximize shareholder value and minimize additional operational
risk. Clearly, credit markets are stressed now. However, we believe
that the parties that might be interested in MDS' assets are
strategic buyers who would not require significant external
financing in order to consummate a transaction. These parties
should be able to produce adequate bids that do not carry financing
risk. As such, the Company cannot point to the troubled credit
markets as a reason not to explore maximizing shareholder value at
the present time. We also believe it would be disingenuous to blame
the weakness in MDS' share price on the current distress in the
financial markets. The stock began its precipitous decline in early
summer after poor second quarter operational results were reported,
particularly in MDS Pharma Services. The decline was further
exacerbated by the disappointing third quarter operational results.
As such, there is no reason to believe that a recovery in financial
markets would necessarily lead to an improvement in the share price
of MDS. In past communications, we indicated we were reviewing
potential courses of action, including calling a special meeting of
shareholders. Given the increased urgency that we -- and we believe
many other shareholders -- feel as a result of the Company's
performance, we expect to take specific steps in short order to
unlock the value trapped inside MDS. If we do call a meeting of
shareholders, the agenda would include two specific items: first,
the removal of one or more long-standing MDS board members, who we
believe have done little to prevent significant value destruction;
and second, a shareholder vote on pursuing the actions we described
above. Ultimately, the strategic direction of this Company should
be up to shareholders, whose voices we believe should be heard more
urgently. We look forward to a prompt response from the Company.
Sincerely, Andrew Rechtschaffen Obrem Capital Management, LLC (1)
MDS third quarter conference call transcript, September 4, 2008.
DATASOURCE: Obrem Capital Management, LLC CONTACT: Andrea Bennett,
Obrem Capital Management, +1-646-454-5310,
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