INFU - InfuSystems Holdings, Inc.

[Philip Morris IV]

This is my first thread on an investment, however I cannot take credit for the idea.  GrizzlyRock first mentioned INFU in the catalyst thread in the strategies forum, with some great bullets.  For convenience:

 

- Market leader in oncology drug infusion pumps and pump servicing. Equipment overly specific & expensive for most hospitals & med service providers to economically own & service.

- Medicare only 1/3rd of the business with private payer contracts negotiated independently

- New CEO.  Chairman capable capital allocator with reasonable incentive to sell.

- Trading at 0.9x price to book while accounting regs specific faster amort of med equipment than economic life.

- Trading at half of intrinsic value: 4.9x EV to EBITDA, 9.8x PE, 15% FCF yield

 

I can add a few things though!

- Unique competitive position: main competition is regional and local DMEs and self-suppliers without scale or cost advantages.

- Looking to leverage their leading national customer base into other lines of business.

- Activist campaign by new chairman Ryan Morris has replaced most of the board and the CEO.  Compensation and other costs have been slashed.  Campaign and severance costs cut last year's results.

- Morris himself is a young value investor and an interesting story.  His Meson Capital fund owns 7% of INFU and 2/3 of this stake was acquired a year ago at $2.25, well above today's price.  Position is 15% of the fund's AUM.

- Shareholder base is concentrated: just-over half of the company is owned by 7 or 8 small private funds, mostly value- or catalyst-oriented.  Gabelli-spawn Teton Advisors has a 2.5% stake.

- Price is cheap on all standard metrics and, aside from a brief dip in the fall of 2011, an all-time low.  Likely well-below the cost basis of most shareholders.

 

Risks/cons:  Overall, not that bad, but I could use some help here.

- They have a good deal of debt, a retained earnings deficit, and some intangibles.  Low on cash, too.

- (However - receivables are good and they recently wrote off a ton of goodwill.  Add in Grizzly's point on accelerated amortization of the pumps and the book value looks understated.)

- Technology changes could threaten their business model.

- They don't manufacture their pumps, they buy them.  So as essentially a rental service, they don't have a ton of leverage in the industry value chain.  Most of their value appears to be in "the network" of cancer centers they've established.

 

Apparently there is a VIC writeup, but I am not a member and do not have access.

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/80577

Another writeup:

http://raybonneau.com/stock-analysis/infu-infusystem-holdings/infu-infusystem-holdings-interesting-micro-cap-opportunity.html

 

Having just caught wind of INFU this weekend, I haven't fully vetted it nor do I have a position.  Grizzly may have better responses to questions.  Unfortunately it appears to be up huge today in the pre-market.  But its shareholder base probably thinks it is worth at least $3, with improving results and new management as catalysts.  Also the possibility of a sale.

[Sportgamma]

I´ll be happy to let mr. Morris buy me out (got in @ $1.37):

 

http://ir.stockpr.com/infusystem/all-sec-filings#document-15944-0000921895-13-001043

 

I, together with my investment partnership Meson Capital Partners LP, beneficially own approximately 8% of the outstanding shares of common stock of InfuSystem Holdings, Inc. (“InfuSystem” or the “Company”).  I first acquired shares of InfuSystem in November 2011 because I strongly believed that with the right leadership in place, InfuSystem could be a leader in its industry.  Since then, significant changes were made to the Board of Directors and management, including my appointment as Executive Chairman, that have engendered a renewed focus on building shareholder value.  As an actively involved Executive Chairman, I have painstakingly studied the InfuSystem business and have become intimately familiar with our employees, customers and other stakeholders.  Despite broad industry-wide challenges, I believe the existing management team can successfully implement new strategies that will keep the Company on its current path of consistent profitability.

 

The shareholders elected a new Board a little over one year ago in April 2012.  I believe shareholders took drastic measures to reconstitute the Board because they believed we had the collective motivation, experience and commitment to restore the business to profitability (which was achieved during the prior three consecutive completed fiscal quarters) and fully evaluate all possible strategic options for the Company, including a going private transaction or sale to a third party, with the aid of Houlihan Lokey who was hired prior to the board reconstitution.  Unfortunately, the same week of the Board transition, InfuSystem was hit by a regulatory shock: the Centers for Medicare & Medicaid Services (“CMS”) announced the creation of a new round of competitive bidding, the Round 1 Recompete, which for the first time included our category of infusion pumps.  The pricing changes are scheduled to be announced later this year and would go into effect January 1, 2014.  Despite an extremely rigorous and exhaustive strategic review process extending over nine months, no buyer surfaced that was willing to accept this substantial risk.

 

As you know, the 2010 Round 1 Re-bid’s pricing cuts from Medicare fee schedules represented a substantial challenge to Durable Medical Equipment (“DME”) industry participants.  After InfuSystem announced that it had suspended the strategic review process in January, CMS announced that the Round 2 competitive bidding yielded even higher price cuts.  The Round 2 results have shocked the DME industry, and some industry leaders, such as Liberty Medical and the Scooter Store, have already filed for bankruptcy due to the Round 2 results.

 

It is clear that the Company will need to transform itself in order to thrive in such a rapidly changing environment and I have worked extremely hard in trying to bring in the additional entrepreneurial management talent that will be required for this.  Prudent management will require that we take risks, that we pursue new business models, that we start new businesses and that we look for novel ways to leverage our people, our customers and our competencies.  Some of these will succeed, and others will not.  After careful evaluation and consultation with my advisors, I believe InfuSystem’s public structure prevents us from maximizing our chances of success.  As a public company, the onerous costs of complying with SEC reporting requirements, the high legal, audit and other costs associated with complying with Sarbanes-Oxley, and the pressure to achieve near-term quarterly results impede our ability to address the challenges of the current environment.  It is critical that we have strong financial backing to support us with capital throughout this critical juncture.

 

 

 

 

 

To that end, while mindful of my fiduciary duties to shareholders as a director, I have been investigating the possibility of taking InfuSystem private, which would allow substantially more operational and financial flexibility than the Company currently has.  I would like permission to obtain the same access to limited non-public information and certain members of management that other bidders were given in order to allow potential financing sources and me to further explore the possibility of formulating a fully-financed acquisition proposal.  Based on conversations that I have had with premier capital sources with direct healthcare expertise (who understand the risks of competitive bidding), I am hopeful that I will be able to deliver a bid with financing commitments that fully and fairly values the Company.

 

I, of course, understand that the Board has a fiduciary obligation to all InfuSystem shareholders.  I believe that allowing me to take the next steps to explore the possibility of submitting a proposal that could maximize shareholder value would be in the best interest of all shareholders.  In addition, given my familiarity with the Company, I am only seeking access to limited non-public information for me and my financing sources.  I am confident that there will be no disruption to management resulting from granting me and potential financing sources the access requested.  I therefore look forward to the Board’s favorable response and a dialogue about the foregoing with each of you or any Special Committee of the Board that may be formed in response to this letter.

 

Sincerely,

 

/s/ Ryan J. Morris

 

Ryan J. Morris

[Philip Morris IV]

I´ll be happy to let mr. Morris buy me out (got in @ $1.37):

 

http://ir.stockpr.com/infusystem/all-sec-filings#document-15944-0000921895-13-001043

 

Nice!  Looks like that premarket jump died too, so the price is still compelling.

 

Not surprised that he might take it private.  It was brought public by a blank check in the first place.

 

Something I don't understand is how much the CMS bidding situation really affects them.  While 1/3 of revenue comes from Medicare, only 1% of revenue is directly associated with the CMS.  But his letter makes a big deal out of this, so I must be missing something.

[Philip Morris IV]

http://www.sec.gov/Archives/edgar/data/1337013/000119312513222723/0001193125-13-222723-index.htm

 

For anyone interested, the board responded to Morris's letter - they asked him to temporarily step down as Exec Chairman as he is granted full access to prepare a possible MBO bid.

 

They gave him until June 15.  Catalyst in the works.  I imagine if he does submit a bid, he'll have a hard time offering less than $2 considering the cost basis of most of the large shareholders.  Could be wrong of course.

[Cunninghamew]

I was wondering if anyone had any thoughts on this co. given d-day is nearing for Ryan Morris to make a decision?

 

"the Board is permitting you and your financing sources, and any other qualified biders, to have access to management only until Jun 15, 2013. The Board expects any indications to be received shortly thereafter. "

[gg]

 

There is insanely low volume, so I don't really think the fact that the price has slowly drifted down closer to the pre-indication of interest from Morris price is too meaningful.

 

Wondering if anyone is still following this story, or might have heard about any fundraising efforts/successes that Meson Capital has had so far

[GrizzlyRock]

Bid is in at $1.85 to $2.00.  This is dramatically below my $2.70 estimate of per share intrinsic value but I haven't spoken to near as many experts as Ryan & Co. My guess is this gets done at the high end of the proposed range in the October time frame.

 

http://www.sec.gov/Archives/edgar/data/1337013/000092189513001439/0000921895-13-001439-index.htm

 

Best of luck to Ryan on running the biz going forward....

 

Letter below for ease of reading:

July 17, 2013

 

Special Committee of the Board of Directors

InfuSystem Holdings, Inc.

31700 Research Park Drive

Madison Heights, Michigan 48071

 

 

Gentlemen:

 

Meson Capital Partners LP and I are pleased to set forth our good faith indication of interest to acquire, through a newly-formed entity, InfuSystem Holdings, Inc. (“InfuSystem” or the “Company”) for between $1.85 and $2.00 per share in cash, representing a 28% to 39% premium to the volume-weighted 30 day average closing price of InfuSystem shares prior to the May 13 letter indicating our initial interest (the “Offer Price”). We believe a transaction represents the best means for shareholders of InfuSystem to obtain liquidity for their shares while maximizing the value of their shares at a premium. Given my familiarity with InfuSystem by virtue of my role as Executive Chairman of the Board and the due diligence we have conducted to date, we believe an acquisition can be consummated on an expeditious basis. Based on our discussions to date with our proposed equity partner, and potential lending sources, we believe that we can finalize our due diligence so that we can obtain all necessary financing commitments no later than the execution of a definitive merger agreement.

 

Since my letter to the Board of Directors of InfuSystem dated May 13, 2013, we have conducted significant business due diligence, including visiting the Company’s corporate headquarters in Madison Heights, numerous conference calls with the senior management team, an extensive review of the materials provided in the data room and substantial industry research, including consultations with industry experts. We now seek to take the next steps where our confirmatory due diligence will require us incurring significant third-party expenses and would require exclusivity for this process.

 

We believe InfuSystem’s growth opportunities present material upside for the Company. However, each of these opportunities is currently pre-revenue and will require significant investments of both time and capital. In addition, InfuSystem faces risks posed by CMS competitive bidding which is legally mandated to have a nation-wide penetration by Jan 1, 2016. We believe the implied LTM valuation pro forma for: 1) full implementation of the cost reductions currently implemented and planned, 2) elimination of all public reporting costs, and 3) adjusting for the estimated price reductions related to CMS competitive bidding, suggest transaction multiples of approximately 7x EBITDA and 15x EBITDA-Capex. The Offer Price represents a significant premium to current trading levels and comps taking these implied valuation multiples into account.

 

In addition, we do not believe it is in the best interest of shareholders for InfuSystem to continue as a public company. Given the disproportionate burden of public company reporting (both financial and in terms of management resources), we believe it is optimal to face the coming reimbursement changes as a privately held corporation in order to eliminate the onerous public company requirements as well as to afford the Company greater financial flexibility in both the short term and the longer term.

 

Our proposal would be conditioned upon satisfactory completion of any open business, legal, operational and financial due diligence (based upon due diligence undertaken to date, we believe due diligence can be completed within 30 days), obtaining necessary third party consents and regulatory approvals, there being no material adverse change in the Company or its prospects prior to closing, receipt of third party financing, and execution of a mutually acceptable definitive merger agreement.

 

This letter and our proposal constitute a preliminary, non-binding indication of interest to acquire all of the outstanding shares of InfuSystem, and are not intended to create any legally binding obligations. The proposal is subject to additional customary terms and conditions, typical of transactions of this type that we intend to negotiate if these high level terms are acceptable. We look forward to the opportunity of working with you to move this transaction forward and request a response to the proposal contained in this letter no later than July 19, 2013.

 

 

Sincerely,

 

/s/ Ryan J. Morris

 

Ryan J. Morris

[xtreeq]

Grizzly - thanks for posting the letter!

 

When trading begins tomorrow do you think there will some time to pick up shares at a decent price? As your IV calculation shows that the offer is low, what are the chances it gets rebuffed and other bidders drive up the price closer to IV? Finally, is the October time frame doable in your opinion?

 

Thanks for your time and thoughts!

[Packer16]

I am sorry but how is this different than Michael Dell stealing Dell computer?  The typical excuses given are just bunk.  Financial flexibility - how is that going to be different with the same company.  Private equity partners - these guys are not going to be patient to get there 20%+ equity returns.  This guy was the executive chairmen.  Does he have any fiduciary responsibility at all?  If he thinks its good bet for him and PE partners why would it not be a good deal for shareholders?  The reduced compliance cost may be real but I would bet that the PE partners and himself help themselves to management fees in excess of these costs.  Just my 2 cents.

 

Packer

[cubsfan]

I am sorry but how is this different than Michael Dell stealing Dell computer?  The typical excuses given are just bunk.  Financial flexibility - how is that going to be different with the same company.  Private equity partners - these guys are not going to be patient to get there 20%+ equity returns.  This guy was the executive chairmen.  Does he have any fiduciary responsibility at all?  If he thinks its good bet for him and PE partners why would it not be a good deal for shareholders?  The reduced compliance cost may be real but I would bet that the PE partners and himself help themselves to management fees in excess of these costs.  Just my 2 cents.

 

Packer

 

+1 - absolutely agree

[Packer16]

If he is such a nice guy then why doesn't he do what he plans on doing as a public company to reward the shareholders of the firm?  Sounds like he is being opportunistic for himself and not for the shareholders.  If this is the way he treats his partners, I would not want be one.  Sounds like Biglari to me.

 

Packer

[oddballstocks]

I am sorry but how is this different than Michael Dell stealing Dell computer?  The typical excuses given are just bunk.  Financial flexibility - how is that going to be different with the same company.  Private equity partners - these guys are not going to be patient to get there 20%+ equity returns.  This guy was the executive chairmen.  Does he have any fiduciary responsibility at all?  If he thinks its good bet for him and PE partners why would it not be a good deal for shareholders?  The reduced compliance cost may be real but I would bet that the PE partners and himself help themselves to management fees in excess of these costs.  Just my 2 cents.

 

Packer

 

Can't agree enough!!

 

Why not just deregister do a reverse split, and file a Form-15?  Then keep shareholders updated via the website or OTCMarkets.  This allows shareholders to participate in this and also eliminates the public reporting burden.

 

In these situations there are so many conflicts of interest, Morris has his partners who are his first and foremost concern, then there's the company's shareholders as the Chairman, and finally his own interests.

 

I'm not against something like this, heck I envy the guy for pulling this off, but quit the BS and write a letter like this "we're trying to buy the company on the cheap, and since shareholders are mostly asleep at the switch we think we can pull it off."

[InelegantInvestor]

I'll see where it bounces, and probably sell. My stake is too small to wait for a fight.

[GrizzlyRock]

I wholeheartedly disagree with the Biglari barb which is unfair on multiple levels (I won’t go into them as I don’t want to pick a fight).

 

Ryan took over the company to rectify a poor management situation and allocate capital efficiently. After doing so, he ran a lengthy sell side process in which ALL relevant parties took a look and passed. Why didn't the company sell last fall?  Competitive bidding popped up and clouded the revenue picture.

 

So now Ryan pivots his strategy, (most likely) finds a large VC or small PE focused on healthcare and tries to buy out the company.  How is that disingenuous? To do the things his letter refers to he needs two things INFU doesn’t currently have: (1) Sufficient capital to prime the pump on new business lines and - more significantly - (2) a deep bench of healthcare experts who will help navigate the treacherous industry in which InfuSystem competes.

 

As such, I do not believe he can accomplish the goals without a strong partner and the partner has no incentive to participate without a meaningful ownership stake.  Makes sense to me. Yes the company may be worth more that $2.00 per share.  Yet with competitive bidding if may be worth much less as well.

[cubsfan]

I wholeheartedly disagree with the Biglari barb which is unfair on multiple levels (I won’t go into them as I don’t want to pick a fight).

 

Ryan took over the company to rectify a poor management situation and allocate capital efficiently. After doing so, he ran a lengthy sell side process in which ALL relevant parties took a look and passed. Why didn't the company sell last fall?  Competitive bidding popped up and clouded the revenue picture.

 

So now Ryan pivots his strategy, (most likely) finds a large VC or small PE focused on healthcare and tries to buy out the company.  How is that disingenuous? To do the things his letter refers to he needs two things INFU doesn’t currently have: (1) Sufficient capital to prime the pump on new business lines and - more significantly - (2) a deep bench of healthcare experts who will help navigate the treacherous industry in which InfuSystem competes.

 

As such, I do not believe he can accomplish the goals without a strong partner and the partner has no incentive to participate without a meaningful ownership stake.  Makes sense to me. Yes the company may be worth more that $2.00 per share.  Yet with competitive bidding if may be worth much less as well.

 

Agree to disagree - it wasn't that long ago, in January, where Ryan was presenting INFU at a "Best Ideas" Conference, calling it

signficantly undervalued, and explaining why he took control and was changing the management, reducing spending, etc. to drive up value.

 

Stock was $1.75 at that point. Now he'll buy out his partners at $1.75.

 

Agree he's being opportunistic here, but Packer has it correct as he's being a lousy "trusted" partner.

[Packer16]

Is asking for the option of current holders (whom he pitched the stock to) to receive the upside if the thesis works out too much to ask?  There are other options to raise capital - rights offering, private placement. etc. that don't require exisiting investors to be cashed out.  He can hire the specialists he needs - and provide them option incentives.  He may have other shareholder friendly actions but this action is more akin to Biglari than Buffet or McElvaine. 

 

Packer

[GrizzlyRock]

So you think Ryan can access both the capital and team necessary in the public markets? Possible yet challenging. 

 

Look at the terms on INFU's current debt deal - market clearly is assigning a super high WACC to the biz.  Does paying those rates jive with your assumptions of what INFU can do as a public company?

[oddballstocks]

So you think Ryan can access both the capital and team necessary in the public markets? Possible yet challenging. 

 

Look at the terms on INFU's current debt deal - market clearly is assigning a super high WACC to the biz.  Does paying those rates jive with your assumptions of what INFU can do as a public company?

 

Not sure why they'd have more options to raise capital being private, usually the reason a private becomes public is to raise capital!

 

Why not do a rights offering, or equity subscription?  Why does it have to be debt?  Debt is the worst type of financing for a venture phase company (which is what this sounds like at this point).  Debt limits flexibility and puts a timer on getting things done, they should be raising as much equity as possible.

 

The problem with equity is it dilutes, and since Ryan appears to be trying to maximize his return, not the company's return that's not in his best interest.

 

This isn't a personal insult or anything, I know some people are friends with him, but to a disinterested outsider this looks like a very poor deal for shareholders.  If Ryan wasn't friends with people on the board and was just some anonymous CEO shareholders would be ranting about how he's stealing the company.

[rijk]

this smells like conflict of interest all over......

 

some interesting reading attached......

 

regards

rijk

2012_Q4_and_2013_Q1_MCP_Letter.pdf

[Packer16]

If it is has a high rate why doesn't he re-finance?  I can see if he comes in as an outsider and makes a deal.  He is an insider and knows the business pretty well and is taking advantage of the market and others whom he led to believe that company is worth much more.  I did not invest in this one but if I did I would feel like I did when Biglari started his shareholder friendly actions so I sold.

 

Packer

[gg]

I think Pabrai might talk about this in his book, but don't remember exactly since I read it so long ago, but the markets very often punish uncertainty. Given the uncertainty regarding the competitive bidding process, and healthcare in the US in general, I think it will be difficult for this company to reach fair value in the public markets. Definitely doesn't help that its such a small company with little analyst coverage.

 

My 2 cents:

-I think Ryan's offer puts a decent floor on the stock price for now

-He is aware that people know how much he paid for his shares, and the obvious argument to be made that if he's buying the company at less than his earlier purchase price (~$2.25, i think) than it means he's undervaluing the company. Therefore, I think this is a first offer to ratchet expectations down, and he ultimately comes out with an offer in the low 2's that ends up seeming even more appealing than if he started negotiations there.

-He is providing the only bid so far. So while everyone can argue that INFU is worth more--they used an investment bank to try shopping the company around and got no offers.

 

In terms of the Biglari comparisons, this is not really comparable because no one will argue that Morris is acting badly toward over his own investors. Biglari  literally drafted an agreement in which his shareholders will have to pay him fees for the right to license his name if he ever gets fired - that takes a massive ego and deranged person to even think of something like that. Morris is simply taking advantage of a situation where he thinks the market is underpricing INFU...He is able to provide a high enough bid that its higher than market, but still low enough that if he's successful, his investors will also be rewarded. 

 

There is an obvious conflict of interest in any situation that a large shareholder makes an offer on the company, but this happens all the time. A special committee is formed, there is a shareholders vote, and other legal ramifications are in place that try to prevent the large shareholders from 'stealing' the company. You can look at it in the one-sided way that he is just stealing the company, but the fact is, he's the only one to make a bid so far an aggressive attempt at shopping the company around. How many Chairmen of public companies would just give up after a failed sale. Instead, Ryan is going out and raising funds and financing commitments and trying to get a deal done which ultimately will allow shareholders to cash out a price that is reasonably higher than it was trading at for a while before his offer.

[GrizzlyRock]

 

Not sure why they'd have more options to raise capital being private, usually the reason a private becomes public is to raise capital!

 

Why not do a rights offering, or equity subscription?  Why does it have to be debt?  Debt is the worst type of financing for a venture phase company (which is what this sounds like at this point).  Debt limits flexibility and puts a timer on getting things done, they should be raising as much equity as possible.

 

The problem with equity is it dilutes, and since Ryan appears to be trying to maximize his return, not the company's return that's not in his best interest.

 

This isn't a personal insult or anything, I know some people are friends with him, but to a disinterested outsider this looks like a very poor deal for shareholders.  If Ryan wasn't friends with people on the board and was just some anonymous CEO shareholders would be ranting about how he's stealing the company.

 

My point is that a large heathcare focused investment firm is likely to have a broad range of talented executives and industry contacts that InfuSystem will not have access to as a public company.

 

Sure - they can hire bankers and a few consultants but that is less impactful than having a strong backstop of a knowledgeable partner with deep pockets.

[wknecht]

Looks like an interesting risk arb idea in and around the price it's at now.

 

Bought a few shares.

[Phaceliacapital]

New SA Article:

 

http://seekingalpha.com/article/1563002-all-systems-go-for-infusystem-mbo

[MYDemaray]

Does anyone have any insight into the strength and seriousness of his equity and lending partners?  Proposing a deal is free, but posting equity and convincing lenders to finance you is a whole different story.