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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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- Update on $INFU based upon 2012 10-K
- Ryan Morris makes his initial bid for INFU