Update on $INFU and Ryan Morris

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Due to travel and my day job, I have not had a lot of time to keep up with the blog.  Over the past weeks, I have been keeping track of my investments and potential ideas, but just haven’t had enough time to put something on the blog.  It could also have to do with the stock market’s continual rise and not finding too many interesting ideas.

I’ve written up InfuSystems ($INFU) awhile back and with the release of their latest quarterly earnings, some new developments have happened that create an interesting situation.  First, the results for the first quarter were good, with a 2% increase in revenue from the year before with a gross margin of 71%.  Net Income was just barely positive, and they used $2.8M to pay down debt.  As expected, both SG&A and Marketing expenses decreased from the previous year.  Overall, not too bad of a quarter.  The new developments include a couple of board members leaving, including Charles Gillman and Dilip Singh.  Dilip Singh was the interim CEO, and has now been replaced with a permanent CEO, Erik Steen.  In addition, John Climaco also resigned from the board.  Overall, that is a lot of change in the makeup of the board of directors, but the company is in a transition period, so it’s expected that changes will take place as the company makes the transition.  What I want to focus on though, is that letter that Ryan Morris sent to the board of directors after the release of earnings, and what it may mean for the company going forward.

Ryan Morris sent a letter to the board requesting permission for limited non-public information to aid in his investigation of taking the company private.  Read the letter in full, but I wouldn’t take everything in the letter at face value.  Specifically, the wording around the changes with CMS and competitive bidding affecting the company negatively, to the point of bankruptcy.  He provides a couple of examples of bankruptcies, but if you research those two companies, they were caught over billing Medicare and needed to pay back money, and the impending bankruptcy  didn’t have anything to do with competitive bidding.  I believe that Ryan Morris sees a very good opportunity to take the company private, save costs associated with being public, and control the company.  As I stated in my initial writeup, I believe INFU is undervalued, and in transition, and if Morris can buy out shareholders, he would have a great company at a great price.  I don’t know if this move will bring other interested buyers to come forward, but I’m going to try to come up with a price that Morris may offer for the company to see if I should add more shares to my existing holdings.

Morris owns 1.795M shares of InfuSystems, through common stock or options.  1.066M of those shares were purchased at an average cost of $2.25.  He began buying shares in late 2011, and we don’t have too much of a record on those transactions, but I’m going to guess that 479k shares were purchased around $1.40 per share.  I believe the strike price of the 250,000 options are $1.75.  Add all of that up, and I calculate an average cost basis of $1.955 per share for Morris.  I believe that Morris cannot put in a lower bid for the company than his cost basis, or he will have to explain why his bid is of value to shareholders if someone was willing to pay more for the shares.  If he comes up with a proposal, it will go to a shareholder vote, so I’m guessing that his lowest bid will be right around $2 per share.

It appears that Morris has until June 15th to review the non-public information, and has accepted the request of the special committee of the board to step down as acting executive chairman until he has completed his due diligence.  My initial guess at a buyout price was in the range of $2.50 per share, but after doing some more investigation, I would expect something lower.  I’m going to wager an initial proposal around $2.25 per share.

Disclosure: Long INFU

 

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Tagged on: INFU, InfuSystem, Ryan Morris
  • Paperwerks

    Thanks for the detailed write-ups on this. I found this by following Leap Tide Capitals 13d last Fall. I have watched Jan Loeb on other stocks and he will sell if it gets close to value. I also came up with a price of $2.10-$2.25 today. Its all up to Morris’ funding source I suppose but risk/reward looks very favorable. I like this blog and will return.

    • http://raybonneau.tumblr.com/ Ray Bonneau

      Thanks for stopping by and reading. Keep me posted if you find other good ideas.

      • infuguy

        that $2.25 block was purchased before the competitive bidding dynamic occurred so I don’t think that is 100% relevant as that was a big headwind that he certainly did not expect before taking on this company. I bet this gets done at $2 though and highly doubt Ryan would have gotten this far and taken this career risk if he wasn’t 100% sure he had the financing so shares at $1.70 look very compelling from here. Ultimately he owns and has influence over most of the shareholder base so while the market is indicating that the probability he doesn’t get the deal done is high I strongly disagree. He wouldn’t have taken it this far if he hadn’t already talked to the shareholder base and had capital committed. This deal gets done for sure, only question is price and timing.

        • http://raybonneau.tumblr.com/ Ray Bonneau

          Thanks for the comment. I suppose Morris can make that argument about competitive bidding increasing the risk in order to reduce his offer. I’m not sold on the competitive bidding process destroying INFU or decreasing the value of the company in a significant way. The two examples he provided in one of his letters were not good examples of the rebid process forcing the companies into bankruptcy. They declared bankruptcy because they overbilled Medicare, and when the government came back for reimbursement of the over bill, it was too much cash for the company to pay.

          If I was on the board (or special committee) I would make the argument that Morris made a large investment at $2.25. That investment was done before the loan was refinanced (big risk there) and the old management team was still in charge. I believe there was just as much risk when he made the investment at $2.25 than there is now.

  • Investor

    It’s 6/17 and no update. Thoughts? Was the deadline just to review the documents or make an offer by? Are you as a shareholder worries he was not able to get funding?

  • Justin

    Shouldn’t this be updated now? Meson just submitted a preliminary tender offer to take the co private at $1.85-$2.00 as I’m sure you’re aware of. What sort of implications does this have? Do you think the bid price will increase seeing as how he bought his shares for $2.25? The Special Committee responded with little interest at those prices, from my understanding, based on their letter filed with the SEC today.

    Let me know.

    Justin

    • http://raybonneau.tumblr.com/ Ray Bonneau

      Justin,

      Yes, I was driving last night, and haven’t had time to update the blog yet. I’m getting ready to add an update. I agree that the price will eventually get raised closer to the $2.25 initial purchase price of Morris.