Orthofix International: Tug of War

| About: Orthofix International (OFIX)

On December 3, 2008, Ramius LLC sent a letter to Orthofix International N.V. (NASDAQ:OFIX), requesting that its Board of Directors immediately engage a strategic advisor to explore and execute a sale or disposition of Blackstone at the highest possible price. Ramius also threatened to call a special shareholders' meeting to replace four members of the Board of Directors to force changes in the already announced restructuring of Blackstone and Orthofix’s capital structure.

Making good on its threat, on December 10, 2008, Ramius announced that it had filed a Preliminary Consent Solicitation Statement with the Securities and Exchange Commission to solicit written requests from shareholders of Orthofix, to call a special general meeting for the purpose of making substantial changes to the composition of Orthofix’s board of directors. Ramius proposes to remove James F. Gero, Peter Hewet, Alan Milinazzo and Walter P. Von Wartburg from the Company’s ten-member board of directors and replace them with four new directors.

Ramius, which now claims to be the beneficial owner of 871,980 shares or approximately 5.1% of the shares outstanding (all acquired after September 11, 2008), announced on January 12, 2009 that it has sent a letter and mailed a Consent Solicitation Statement to shareholders of Orthofix.

Approval for calling a special shareholder’s meeting requires a positive response by 10% of the shares outstanding. Can Ramius find the necessary shares to vote in its favor? We think it will be challenging but possible. But even if Ramius is successful in calling a special meeting, we believe it will not be succeed in placing its candidates on the Board of Directors.

Consider the following:

  • It is difficult to argue that Blackstone was a well conceived acquisition or that it has been managed correctly since it was acquired. Blackstone’s revenue growth slowed dramatically soon after it was acquired and actually declined 13% Y/Y and 6% sequentially in the most recently reported quarter. The acquisition also resulted in Orthofix taking on huge debt of over $300 million which, because of a breach in its loan covenants, required renegotiation in October 2008 resulting in an increase in the interest rate to LIBOR + 450 basis points from LIBOR + 175 basis points. Orthofix has also written off approximately 93% or more than $300 million as the carrying value of Blackstone. All of this, in addition to the stock market’s poor performance, has resulted in Orthofix’s shares being off more than 70% over the past 12 months.
  • Management opposes the calling of a special meeting because “the Board and management are making significant progress in executing a strategic plan that is sound, and that we believe will maximize shareholder value”. And “to call a special meeting of shareholders will waste money and cause needless distraction for our management team, which we would prefer remain focused on our businesses. We believe if Ramius chooses to spend money in such an inefficient and, frankly, wasteful way, those dollars should come from Ramius, not from all of Orthofix’s shareholders. To that end, if a special meeting results from the current consent solicitation process, we would expect that Ramius will fully pay the costs of any such special meeting”. The company’s regular annual meeting generally occurs in mid-June.
  • Management directly controls 7.3% of the shares outstanding with a former Chairman of the Board, Robert Gaines Cooper, controlling an additional 5.3% of the shares, all safely on management’s side. Fidelity management controls 9.7%, Paradigm Capital Management 5.4%, and Columbia Wanger and Porter Olin LLC 5.3% each. Together with management and the former board member these holdings constitute 38.3% of the shares outstanding. Any defection by these large institutional holders could result in success for Ramius, but several have been long-term shareholders and might be inclined to support management’s attempt to turn the the company around.

The real question shareholders must ask is the one being posed by Ramius: Can they wait to see the results of the restructuring or risk further damage to the company? We believe that because the threshold of 10% is fairly low, it is highly likely that there are enough disgruntled shareholders that will join Ramius in calling for a special meeting.

However, we also believe that in the event of a special meeting, Ramius will not be successful in seating its four candidates, which will require more than 80% of those shares not represented in the aforementioned group voting in favor of the Ramius’ slate. The silver lining in this is that Orthofix’s Board and management may be able to dispose of this problem quickly and it will not linger to mid-2009. If Ramius does not get the special meeting, surely it, or some other dissident group, will raise the issue in June.

Disclosure: no positions

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