Ramius Capital Discloses 9.9% Stake in Kensey Nash (KNSY), Requests Changes, Tender Offer
In the letter the firm said, "Kensey Nash should refocus its efforts and resources on its core biomaterials business and significantly reduce spending and management effort on the endovascular business and its associated direct sales force."
The firm also said, "One option that the Board should consider is a Dutch auction tender offer. Assuming a 20% percent premium to the current market price, a tender offer would allow Kensey Nash to repurchase approximately 31% to 42% of its shares outstanding while maintaining a relatively low debt ratio and conservative balance sheet."
A Copy of the Letter:
Dear Joe, (Pres./CEO),
We enjoyed meeting with Wendy and you at your headquarters as well as seeing youpresent at the Needham & Company conference in New York in mid-June. Yourwillingness to engage in meaningful dialogue has been extremely helpful to us ingaining a better understanding of the future opportunities for Kensey NashCorporation ("Kensey Nash" or "the Company") and the challenges it faces. Welook forward to continuing our dialogue with you and your senior managementteam.
As disclosed today in a Schedule 13D filing with the Securities and ExchangeCommission, Admiral Advisors, LLC, a subsidiary of Ramius Capital Group, L.L.C.,together with its affiliates, currently own 9.9% of Kensey Nash. We are now thethird largest shareholder of the Company. We believe the Company issignificantly undervalued when compared to its intrinsic value. To properlyaddress this issue, Kensey Nash should refocus its efforts and resources on itscore biomaterials business and significantly reduce spending and managementeffort on the endovascular business and its associated direct sales force.
In our view, the future success of Kensey Nash will be driven by thebiomaterials business. The Company, together with its partner St. Jude Medical,has the pre-eminent name in the vascular closure market with greater than 65%market share for the Angio-Seal product line. Through this partnership, Kensey Nash generates a strong royalty stream and associated product sales for theCompany's proprietary collagen plug and plastic anchors. The Company has beenable to leverage its expertise in the development and manufacturing ofbiomaterials to partner with many of the leading companies in the medical devicespace, including Arthrex, Biomet, Medtronic, Orthovita, Zimmer, as well asothers. This represents a strong growth opportunity for Kensey Nash without therisks and challenges of supporting a direct sales force.
Unlike the biomaterials business, for which Kensey Nash is known for itsproprietary collagen technology, manufacturing expertise, and development knowhow, the Company faces significant challenges in the endovascular business.Kensey Nash faces intense competition from large, well-funded corporations whohave integrated sales forces with portfolios of well-branded products that arerecognized by doctors worldwide.
We believe Kensey Nash could save up to $20 million per year by discontinuingthe direct sales model and significantly curtailing the research and developmentexpenses associated with the endovascular product line. In the last twelvemonths, the Company spent close to $9.5 million in sales and marketing, nearlyall of which was spent on endovascular products. Additionally, the Company spentover $16.4 million on research and development in the last twelve months,approximately 60% of which was spent on endovascular product development.Instead of continuing to fund the cash burn on the endovascular product line,the Company should explore partnership options for the approved endovascularproducts and adopt a similar approach for ongoing development that has led tothe significant accomplishments in the biomaterials business.
Based on our analysis, if you factor in the above cost savings, we believeKensey Nash could achieve EBITDA in fiscal year 2008 of between $35 and $40million, or almost twice the prior year level while maintaining an attractivegrowth profile.
We also believe Kensey Nash should address its inefficient capital structure. Atthe end of the last quarter, the Company had cash and cash equivalents of $32.4million and an outstanding mortgage note of $8 million. Additionally, theCompany is required to draw down the remaining $27 million from the mortgageline on or before November 25, 2007. Pro forma for the draw down, Kensey Nashwill have close to $60 million of cash and $35 million of mortgage debt. Inaddition to the mortgage debt, we believe it would be prudent for the Company tocarry a debt balance of 1.5x - 2.5x EBITDA or an incremental $60 million to $100million. This would provide $120 million to $160 million of cash available forshare repurchases or dividends to shareholders.
One option that the Board should consider is a Dutch auction tender offer.Assuming a 20% percent premium to the current market price, a tender offer wouldallow Kensey Nash to repurchase approximately 31% to 42% of its sharesoutstanding while maintaining a relatively low debt ratio and conservativebalance sheet.
As we have outlined, there is a significant opportunity to unlock value atKensey Nash. We look forward to the opportunity to work with you, seniormanagement, and the Board to meet that objective.
Jeffrey C. Smith
Ramius Capital Group