In a 13D filing on HealthSpring (NYSE:HS) Wednesday morning, Clinton Group disclosed a 5.05% stake (2,893,404 shares) in the company and a letter to the company suggesting they undertake a leveraged recapitalization and a Dutch tender offer. The firm sent a follow-up letter noting that they have not heard back from the CEO regarding its proposal.
From the Filing:
On June 15, 2007, CGI sent a letter to the Issuer's Chairman and CEO, Mr. Herbert A. Fritch, expressing its support of the Issuer's management team and its view of the Issuer as an attractive long-term investment. The letter noted that the Issuer's stock price has retreated to levels below that of the Issuer's initial public offering in February 2006 and, in CGI's opinion, is undervalued. CGI suggested that the Issuer consider undertaking a leveraged recapitalization and a Dutch tender offer in the range of $22.00 to $23.00 per share for approximately 30% of the outstanding shares in order to better optimize the Issuer's balance sheet and to take advantage of the appealing debt financing markets in an accretive transaction. Further, CGI offered itself as a sounding board for the Issuer's management team in discussing value maximization opportunities, including a potential privatization in which CGI would participate. A copy of this letter is attached hereto as Exhibit B and incorporated herein by reference.
On June 26, 2007, CGI sent a letter to the Issuer's Board of Directors (the "Board") to notify the Board that since CGI had not heard back from Mr. Fritch regarding its proposal to increase shareholder value, CGI deemed it appropriate to forward the June 15, 2007 letter to the Board's attention. A copy of this letter is attached hereto as Exhibit C and incorporated herein by reference.
Copy of First Letter 6/15/2007:
Dear Mr. Fritch: (NYSE:CEO)
As one of the largest investors of HealthSpring, Inc. (the "Company" or"HealthSpring") and given the recent performance in the stock price, we thought it would be appropriate to detail to you our ideas with regards to the financial structure of the Company. We are very supportive of your management team and view HealthSpring as an attractive long-term investment. We hope you find this constructive and would welcome any follow-up discussions with you and your team.
UNDERPERFORMANCE SINCE IPO
As a result of the earnings guidance revision, the Company's stock price has retreated to levels below the price of $19.50 per share pursuant to the Company's initial public offering in February 2006. As a comparison, the S&P 500Index and Dow Jones Industrial Average have increased 20% and 25%, respectively,since February 2006. Furthermore, the strong cash generation of your business over the past five quarters SHOULD HAVE increased your market value of equity.
Based on a current stock price today of approximately $19.00, the implied valuation multiples are as follows:
Clearly, there is a disconnect in the Street's valuation of the Company, and the earnings revision with regards to medical loss ratios have caused a deterioration in shareholder's confidence in the execution capabilities of management. As a comparison, the forward 2006 PE multiple at the pricing of the IPO was 19.5x. Furthermore, we share management's view that your business specialized in Medicare Advantage - HMO products is more defensible than other companies focused on managed Medicare, and could argue that a premium multiple to comparable companies' implied valuations may be warranted.
LEVERAGED RECAPITALIZATION AND DUTCH TENDER
We believe that you and your management team share our view of the Company's under-valuation relative to its growth prospects going forward. At this point,given the current stock price, we believe that it is in the best interest of shareholders for the Company to execute a leveraged recapitalization in conjunction with a Dutch Tender offer for approximately 30% of the outstanding shares of the Company at a reasonable premium to the current market prices.
Based on our monitoring of the debt financing markets and conversations with our investment banking relationships, we believe that a modest $338 million credit facility borrowing (Revolver and Term Loan B) is certainly financeable and could be achieved at attractive rates of at least L+175 to L+200 with flexible terms with regards to prepayment and the absence of financial covenants. This debt financing along with cash on the balance sheet would comprise the amount required to execute the Dutch Tender.
We believe that an appropriate range to set the Dutch Tender is $22.00 to $23.00per share based on (i) the earnings accretion resulting from the transaction;(ii) the price range's implied premiums to divesting shareholders; and (iii)that the price range is below an expected post-tender trading range. Sources and uses and pro forma capitalization for this transaction would be as follows:
Based on this transaction, an illustration of the earnings impact is set forth below. We estimate 13.8% accretion.
It could be argued that post the tender, the PE could increase due to accelerated estimated EPS growth. Assuming HealthSpring trades at the comparable companies valuation multiple of 13.9x, the implied share price post-transaction would be $23.42.
We believe the contemplated transaction would: (i) better optimize the Company's balance sheet and provide conservative leverage to equity returns going forward and (ii) take advantage of the extremely appealing debt financing markets.
We note that your total debt as of September 30, 2005 (prior to the IPO) was$192 million. Conservatively excluding any unrestricted cash in both cases, the Company's total debt to EBITDA was 2.7x pre-IPO compared to the above transaction's pro forma leverage of 3.0x total debt to EBITDA. Pro forma for the transaction detailed above, the Company would have additional debt capacity and over $25 million in unrestricted balance sheet cash plus cash flow generated from operations.
We believe that this is a pivotal point in the Company's history as a public company. We believe that the transaction detailed is a prudent one from a financial point of view while offering significant upside to continuing shareholders.
I want to reiterate that we are supportive of your management and excited about the growth prospects and strategic positioning of the Company. We have along-term view regarding our investment in HealthSpring and are happy to offer ourselves as a sounding board for your team in discussing value maximization opportunities.
We hope that you find this letter constructive and look forward to your timely response. We would welcome the opportunity to discuss our proposal in person or by teleconference. As an aside, our investment team also manages the private equity fund at the Clinton Group and would be happy to explore a privatization with you, if appropriate.
Please feel free to contact me at your convenience at (212) 377-xxxx or my colleague, Joseph De Perio, at (212) 739-xxxx to discuss any and all issues. We look forward to hearing from you.
Senior Managing Director
Copy of Second Letter 06/26/07:
Attention: Board of Directors
As of today, funds and accounts managed by Clinton Group Inc. ("Clinton")currently beneficially own approximately 5% of the outstanding shares ofHealthSpring, Inc.
Two weeks ago, we sent the attached letter to Mr. Herbert A. Fritch describing our thoughts on opportunities to increase shareholder value. Despite what we believe is a prudent proposal designed to enhance shareholder value, we have not heard back from Mr. Fritch, so we deemed it appropriate to forward this letter to your attention as well.
Please feel free to contact me at your convenience at (212) 377-4224 or my colleague, Joseph De Perio, at (212) 739-1833 to discuss our proposal as well as any and all issues. We look forward to hearing from you.
Senior Managing Director
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