In a 13D filing on Kensey Nash Corp. (Nasdaq: KNSY), Ramius Capital disclosed a 9.9% stake (1,180,634 shares) in the company and disclosed a letter to the President and CEO expressing its belief that the Shares are significantly undervalued and highlighting several opportunities to improve the value of the shares.
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 you present at the Needham & Company conference in New York in mid-June. Your willingness to engage in meaningful dialogue has been extremely helpful to us ingaining a better understanding of the future opportunities for Kensey Nash Corporation ("Kensey Nash" or "the Company") and the challenges it faces. We look forward to continuing our dialogue with you and your senior management team.
As disclosed today in a Schedule 13D filing with the Securities and Exchange Commission, 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 the third largest shareholder of the Company. We believe the Company is significantly 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 management effort on the endovascular business and its associated direct sales force.
In our view, the future success of Kensey Nash will be driven by the biomaterials 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 the Company's proprietary collagen plug and plastic anchors. The Company has been able to leverage its expertise in the development and manufacturing of biomaterials to partner with many of the leading companies in the medical device space, including Arthrex, Biomet, Medtronic, Orthovita, Zimmer, as well as others. This represents a strong growth opportunity for Kensey Nash without the risks and challenges of supporting a direct sales force.
Unlike the biomaterials business, for which Kensey Nash is known for its proprietary 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 who have integrated sales forces with portfolios of well-branded products that are recognized by doctors worldwide.
We believe Kensey Nash could save up to $20 million per year by discontinuing the direct sales model and significantly curtailing the research and development expenses 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 spent over $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 endovascular products and adopt a similar approach for ongoing development that has led to the significant accomplishments in the biomaterials business.
Based on our analysis, if you factor in the above cost savings, we believe Kensey Nash could achieve EBITDA in fiscal year 2008 of between $35 and $40million, or almost twice the prior year level while maintaining an attractive growth 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, the Company is required to draw down the remaining $27 million from the mortgage line on or before November 25, 2007. Pro forma for the draw down, Kensey Nash will 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 to carry 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 for share 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 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.
As we have outlined, there is a significant opportunity to unlock value atKensey Nash. We look forward to the opportunity to work with you, senior management, and the Board to meet that objective.
Jeffrey C. Smith
Ramius Capital Group
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