I chose the title to this article based on the old adage of "sh**t or get off the pot" -- my sentiments regarding the ongoing Obagi Medical Products (OMPI) saga that has escalated to its current point after VOCE Capital Management wrote an updated note to Obagi shareholders this past Monday.
J. Daniel Plants, VOCE's Managing Partner, stated:
In my address at the shareholder meeting, I admonished the Board to heed the strong message sent by shareholders. While we have stood down since then, we cannot remain silent any longer in the face of the Obagi Board's continued destructive stewardship of this company."
The Board's first action after losing the poison pill vote was to award itself a substantial raise. It has continued to direct payments to affiliates of a private company controlled and run by the Obagi CEO. Despite VOCE's requests for Board reform, none of the existing directors have been removed, and the company has refused to make its one new director (appointed without a shareholder vote) available to meet with VOCE.
VOCE further notes that Obagi has announced its intention to spend more than $11 million of shareholder capital in 2012 in pursuit of its 'direct-to-consumer' internet scheme.
Plants also went on to remark:
The company's lack of competence to pursue such a strategy is evident in its addiction to high-priced external consultants for every phase of the project and in the constantly shifting explanations for how it will operate.
VOCE released its first open letter to the company and its shareholders in February of this year, which was critical of Obagi's management on several fronts, many I personally agree with, being a former Obagi shareholder myself. VOCE's main contention with the company was regarding the poison pill that the Board of Directors (BOD) put in place in late 2011, clearly designed to thwart any attempt at a hostile takeover.
VOCE was also clear in the February letter in asking Obagi shareholders to vote out certain BOD members it felt were hurting the company.
Dan Plants's remarks from the February open letter:
The Board's hiring of Mr. Hummel as CEO - himself a director at the time of his appointment - is also troubling. Mr. Hummel is concurrently the chief executive of another company, Cobrek Pharmaceuticals, Inc. ("Cobrek"), based in suburban Chicago. How can the CEO of a public company also be the CEO of another company in another city at the same time? Moreover, since Mr. Hummel has taken over as CEO of Obagi the Company has begun making payments to Cobrek for unspecified "consulting" services. While the Company has previously responded to us that these matters have all been disclosed in public filings, their disclosure does not clear their unseemly air let alone make them appropriate actions for a publicly-traded corporation.
But the most glaring governance deficiency is that the management and Board of Obagi own almost none of its common stock. Collectively, the six members of the Board (including Mr. Hummel) own less than 1% of the Company's common stock. To our knowledge, none of the directors have ever purchased a single share of Obagi stock in the open market, including when it touched multi-year lows in 2009 and including when the Board thought the stock was a compelling enough value that it authorized the Company to repurchase shares.
This lack of alignment with shareholder interests is succinctly illustrated by the continued Board membership of Messrs. Fitzgibbons and Bartholdson. These gentlemen are both executives of Stonington Partners ("Stonington"), a leveraged buyout firm. They, along with Mr. Hummel, obtained their Board seats after the acquisition of Obagi by Stonington but prior to its IPO. While it is not uncommon for a financial sponsor to retain board representation following an IPO if it continues to hold a significant ownership position, Stonington sold all of its remaining Obagi shares (primarily back to the Company) in 2010. To permit these gentlemen to retain their seats after the disposition of all but a token amount of their ownership suggests that their actions are primarily motivated by a desire to retain the prestige and perquisites of sitting on a public Board.
It's clear to me that Hummel has a conflict of interest here and needs to be removed. VOCE made and continues to make a great case here, but I am appalled at the inaction of the majority of Obagi shareholders to stand up and do what is in their best interest. It should be very clear to anyone who does the proper due diligence on the company's BOD that most of them need to go. While they remain, do not expect these guys to explore selling the company to a bigger company who could maximize the Obagi line of products -- namely establishing a large presence in Asia, where the Obagi products could achieve maximum value.
Let's first take a look at the vote for the proposal to remove the poison pill:
Proposal 3: At the 2012 Annual Meeting, the stockholders voted against the ratification of the company's Stockholder Rights Plan. The vote on this proposal was as follows:
Votes For: 6,018,778
Votes Against: 10,397,968
Broker Non-Votes: 904,517
We can clearly see from above that the "Stockholder Rights Plan" (Poison Pill) was defeated by a wide margin. VOCE, as mentioned, also asked for the removal of certain BOD members -- let's see how that vote went:
Proposal 1: At the 2012 Annual Meeting, the stockholders elected each of the nominees listed below as directors to serve on the Company's Board of Directors until the next annual meeting of stockholders and/or until their successors are duly elected and qualified. The vote for the directors VOCE asked to be removed was as follows:
Total Withheld Votes
Total Broker Non-Votes
Albert F. Hummel
Albert J. Fitzgibbons III
John A. Bartholdson
Apparently, VOCE did not get the message through clearly enough to the 90% institutional ownership at the time. (Currently, Obagi has 78% institutional ownership)
I have to ask what good does Dan Plants of VOCE think another public "thrashing" of the Obagi BOD will do this time? VOCE not only holds Obagi shares, but also acts as a proxy for some shareholders. My question to Dan is, why can't you convince shareholders to vote the BOD members out who clearly do not have the shareholders' best interests at heart?
I am also even more critical of the institutions who own most of the Obagi float. Why did they vote back in BOD members who are against their interests?
There are many companies out there I feel would be very interested in acquiring Obagi for its well-known skin care line of products. The 3 I list below I feel are best suited to acquire the company.
L'Oreal (LRLCY.PK), which offers various consumer products such as skin care, make-up, hair color, hair care, and styling products under the L'Oreal Paris, Le Club des Créateurs, Garnier, Maybelline New York, Softsheen Carson, and Essie brand names. L'Oreal would certainly be able to maximize the value of the Obagi product line with its large international presence.
Valeant Pharmaceuticals (VRX), a leading developer, manufacturer, and marketer of pharmaceutical products in the areas of neurology, dermatology, and branded generics, should also have interest in OMPI.
With Valeant's recent acquisition of Medicis, the company has put itself into a potential dominant market share position. According to Valeant's Chairman and Chief Executive Officer, J. Michael Pearson,
The acquisition of Medicis represents a significant next step in our journey to become the leader in dermatology by strengthening Valeant's presence in acne, actinic keratosis, aesthetic injectables and anti-virals, among others. Medicis' highly complementary portfolio of leading branded products and promising pipeline is a solid strategic fit, and we look forward to leveraging Medicis' well known and respected name in dermatology to drive long-term growth.
Thirdly, Allergan (AGN), a multi-specialty healthcare company primarily in the United States, Europe, Latin America, and the Asia Pacific might be the best suited to acquire Obagi. Allergan discovers, develops, and commercializes specialty pharmaceutical, biologics, medical device, and over-the-counter products for several specialty markets. These include the ophthalmic, neurological, medical aesthetics, medical dermatological, breast aesthetics, obesity intervention, urological, and others worldwide.
Valeant's move in acquiring Medicis certainly gives it a ton of leverage in the dermatology space, and might threaten Allergan's long-term position in the segment. I strongly feel that Obagi's product line would suit Allergan well, as most of Obagi's skin care products require a Dermatologist prescription. Also, Allergan can gain a good international presence, especially in Asia, with the Obagi line. Allergan has the money -- the question is will it use some of that money to attempt to lever a deal and make a bid for Obagi? It will be much easier for any of these companies to make a play for Obagi if the shareholders "get off the pot" and vote out BOD members who have their own interest at heart versus the company shareholders.
Recently, Fougera was sold for 3.55 times sales, suggesting an offer could be as high as $23 a share should one appear. Obagi has a low market cap of $235.04M -- an acquisition price of $20 a share would equate to a total cash deal of approximately $345M based on OMPI's 18.73M shares outstanding. This is a dirt cheap price considering the value OMPI would bring to any and all the companies mentioned above.
Also recently, I had the pleasure to speak with David Callan, an activist shareholder who owns a large block of Obagi shares.
I spoke with David both via a phone call and by email in preparation for an article I wrote informing the investment community of Callan's intentions regarding Obagi. Callan has been involved with helping to initiate the acquisitions of other companies in the past.
Callan has had success as a shareholder activist in the past with other public medical companies generating sales similar to Obagi in excess of $100 million. In 2007, he was actively involved in the sale of E-Z-EM for $240M to Bracco Diagnostics, Inc., the U.S. based subsidiary of Bracco Diagnostics.
Getting Obagi to explore strategic alternatives will be a tall order for Callan to pull off on his own -- he needs the support and backing of all Obagi Shareholders. I do know that Callan is actively seeking ways to bring this issue to an acceptable resolution for all Obagi shareholders. In my opinion, the best course of action is to initiate a special shareholders meeting, vote the BOD members out who appear to have multiple conflicts of interest, and replace them with BOD members who would be in favor of exploring a sale of the company. If this cannot be done, a possible lawsuit might be brought here that potentially would focus on the current BOD neglecting its fiduciary duties.
It's time for Obagi shareholders to act, and act with force and clarity. Obagi insiders have next to no stake in the company, yet run the company as if it was a privately held one. This situation reminds me a bit of a scene from the movie "Wallstreet" were Gordon Gecko thrashes on the Teldar Paper BOD:
Well, I appreciate the opportunity you're giving me Mr. Cromwell as the single largest shareholder in Teldar Paper, to speak. Well, ladies and gentlemen we're not here to indulge in fantasy but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes.
I call on all Obagi shareholders to take strong action here. Sitting around and hoping these fat cat BOD members do what is in the best interest of the shareholders has proven to be a waste of time -- it's time to either sh**t or get of the pot!
Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.