HENDERSONVILLE, TN / June 20, 2016 / Empirical Capital Management is writing regarding Zimmer Biomet’s (NYSE:ZBH) June 6, 2016 announcement of a tender offer to acquire LDR Holding Corporation (NASDAQ:LDRH). Empirical began accumulating shares of LDRH on February 10, 2014, and has since transacted 140 additional purchases of the stock. Empirical Capital Partners LP owns 446,441 shares of LDRH, or approximately 1.5% of the company.
We believe the Board of Directors of LDR Holding Corporation is not fulfilling its fiduciary duty of maximizing shareholder value. Empirical Capital Management contends that LDR Holding Corporation, under the stewardship of its Directors, negotiated a sale of the company near a trough in its equity’s pricing and at the precipice of the long-term fundamental opportunity articulated to investors. At the same time, the Board compromised an absolute competitive bid process by agreeing not to solicit alternative transactions. We also find certain information contained in the recent 14D-9 filing to be concerning.
First, we underscore that the proposed offer of $37.00 per share represents a 22% discount to LDRH’s 52-week high of $47.12. Additionally, since the beginning of 2015 through June 6, 2016, comprising of 360 trading days, shares of LDRH have traded above $37.00 per share (tender offer consideration) in 149 market days, or 41% of the time and above $40.00 per share in 75 market days, or 21% of the time. We are perplexed by the Board’s eagerness to sell the whole company for $37.00 per share, especially considering the market readily absorbed 2.0 million shares at $40.00 per share in the Company’s August 13, 2015 secondary offering. We find it inconceivable that the Board would agree to sell the Company for less than $40.00 per share. Certainly, LDR Holding Corporation is worth even more to a strategic buyer than it is to the passive shareholders that participated in the secondary offering.
Second, management routinely cited the peer-reviewed publication of long-term clinical data of cTDR versus ACDF as the most relevant hurdle for the broadening of reimbursement coverage of its exclusive technology product, Mobi-C. The company just recently earned such publication from the Journal of Neurosurgery on March 29, 2016. As the first and only FDA approved cervical disc replacement (the fastest growing segment of spinal surgery) device for both one and two-level indications, LDR Holding maintains a significant first mover advantage through its Mobi-C product. To no surprise, ZimmerBiomet CEO, David Dvorak described Mobi-C as the "principal door opener" of the acquisition. Regarding the acquisition, the president of Zimmer’s spine unit Adam Smith later stated, "We have a great market access team today inside of Zimmer Biomet. And we believe that in our modeling and in our dealings with payers during the diligence process, that we’re going to see rapid expansion over the course of the next five years." With the long awaited five-year clinical data ingrained in a peer-reviewed publication, LDR Holding now sits on the threshold of explosive growth as large insurance carriers begin to update their policy coverage (this summer) to include the most innovative and disruptive technology in all of spinal surgery. Undoubtedly, LDR Holding is now poised to capture a significant share of its addressable market, following a period of patchy reimbursement coverage for its flagship product.
Third, in a review of the June 14, 2016 14D-9 filing, Empirical Capital Management is troubled by the following:
Potential conflicts of interest: LDR Holding Corporation’s retention of Bank of America Merrill Lynch (BAML) as the company’s financial advisor, despite BAML deriving $25 million in corporate and investment banking services revenues from Zimmer Biomet during the last two years. LDR Holding Corporation’s retention of BAML as its financial advisor, notwithstanding BAML’s material relationship with KKR and TPG (derived up to $185 million in combined revenue from corporate and investment banking services), each of which have a representative that serves on Zimmer Biomet’s board of directors BAML acted as the financial advisor to Biomet, Inc. in its sale to Zimmer Holdings, Inc. LDR Holding Corporation management’s five-year forecast is significantly more favorable than consensus estimates: Internal forecast for Fiscal Year 2018 revenue of $286.4 million is 14.5% above the current consensus estimate (6 estimates) of $250.2 million Internal forecast for Fiscal Year 2018 Adjusted EBITDA of $32.7 million is 94.7% above the current consensus estimate (4 estimates) of $16.8 million Overstated premium of the offer compared to the volume weighted average prices (VWAP) over the 30-day and 180-day periods prior to the execution of the merger agreement: The implied 30-day VWAP based on the 67.1% premium documented in the filing is $22.14We determined the 30-day VWAP to be $23.49, suggesting a 57.5% offer premium The implied 180-day VWAP based on the 65.7% premium documented in the filing is $22.33We determined the 180-day VWAP to be $24.05, suggesting a 53.9% offer premium We note that the deviations narrowed when using calendar days as opposed to market days, but we view this as an irregular calculation methodology Lack of competitive bid process The Board conceded its original request for a go-shop provision despite being advised to contact other potential suitors The Board conceded two days of its original request for a five-day matching right period The Board agreed to a no-solicitation covenant BAML was not requested to, and did not solicit indications of interest or proposals from third parties regarding a possible acquisition of all or any part of LDR or any alternative transaction
Altogether, we consider the timing of the proposed deal to be disadvantageous for shareholders. And while the tender offer may appear as a significant premium to the preceding market price, we contend that the Company is worth significantly more than $37.00 per share and that the presumed premium is simply a circumstance of timing. In fact, during the aforementioned 360-day period, the average market valuation of LDR Holding was $880 million. Thus, Zimmer Biomet’s $1.0 billion offer is a mere 13.7% premium to LDRH’s long-term moving average.
In conclusion, we do not believe the LDR Holding Corporation Board of Directors has obtained the greatest value from the pending transaction that is reasonably attainable for shareholders. We dispute that a three day matching period and pre-signing market check suffices as an absolute competitive bid process. We can only conclude that the Board has either been persuaded internally to sell the company too cheap, or it has been completely out negotiated by its suitor. We believe the Board may have been negligent in the exercise of its fiduciary duty to maximize shareholder value, having used poor business judgment in electing not to actively seek the highest bid out of fear of "the potential harm that a leak regarding a potential transaction would have on its ongoing standalone business prospects." We urge the board to either solicit a superior transaction at no less than $42.00 per share or remain as an independent public company, particularly in advance of the two level coverage acceleration and a proliferation of cervical disc replacement procedures using Mobi-C.
Cristan K. Blackman
Empirical Capital Management, LLC
This letter may contain certain factual and statistical industry and market data and other information that was obtained by Empirical Capital Management from independent, third-party sources that it deems to be reliable. However, Empirical Capital Management has not independently verified such data or information or the reasonableness of the assumptions upon which such data and other information was based and therefore there can be no assurance as to the accuracy of such data or other information.
Disclosure: I am/we are long LDRH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.