Argues That Separating The Unrelated Divisions Could Lead To Potential Value Creation Of 40-75% And Dismisses Management's Arguments Against Tax-Free Spin-Off
NEW YORK, Feb. 12 /PRNewswire/ -- MMI Investments, L.P., one of the largest stockholders of Chemed Corporation (NYSE: CHE), announced today that it has sent a letter to the Board of Directors of Chemed in which MMI argues that the combination of Roto-Rooter under the same corporate umbrella as Vitas makes little strategic and economic sense and that the two should be separated by means of a tax-free spin-off that would allow shareholders to benefit from each company's value as a separate entity.
Based on the valuation of comparable public companies and prices paid in precedent transactions, as set forth in an analysis included with the letter, MMI estimates that a tax-free spin-off could potentially yield an increase of 40-75% per share from Chemed's February 11th closing price. Speaking on behalf of MMI, Clay Lifflander explained that despite public statements by Chemed's management arguing against a spin-off, it has presented no compelling reason for its view, and that Chemed's current structure is denying shareholders the ability to recognize maximum value for their investment. Mr. Lifflander called on the Board to provide its view regarding a spin-off to shareholders as soon as possible.
The full text of the letter follows:
February 12, 2009 The Board of Directors c/o Chairman Edward L. Hutton Chemed Corporation 2600 Chemed Center 255 East Fifth Street Cincinnati, Ohio 45202-4726
Dear Members of the Board,
MMI Investments, L.P. is the owner of 800,000 shares of Chemed Corporation or approximately 3.6% of its outstanding common stock. As a long-term value investor, we believe Chemed's two divisions, Roto-Rooter and Vitas, share an extremely attractive cash flow profile. This financial characteristic appears to be the only thing that Roto-Rooter and Vitas share. These diverse businesses, plumbing/drain-cleaning and hospice care, have separate operations, brands, management, customers, economic sensitivities, financing needs, different potential strategic alternatives and fair market valuations. Logic clearly dictates that Roto-Rooter and Vitas do not belong together, and but for Chemed's lineage as a diversified conglomerate, they would already be separate entities. We believe this combination creates no synergy and is inhibiting value realization, and that these two businesses should be separated by means of a tax-free spin-off.
We have enclosed herewith an analysis that compares Chemed's current valuation and stock price with that of comparable public companies to each of its subsidiaries and with the valuations ascribed to such companies in takeover transactions. Subject to the assumptions set forth in the enclosed analysis, the potential outcomes from a spin-off are impressive: a stock price of more than $55 to nearly $62 on an independent trading basis, and more than $68 to nearly $71 per share if both businesses were subsequently taken over. A takeover of these businesses in the present structure is highly unlikely due to the lack of a single strategic acquirer for both businesses. These ranges imply a baseline potential increase of approximately 40% to 75% from Chemed's February 11th closing price of $40 per share. Ironically, we believe the greatest limitation of this analysis (that there is currently only one publicly-traded comparable for Roto-Rooter) makes our strongest point: nearly all of Roto-Rooter's public comparables have been acquired already.
We have repeatedly heard management of Chemed list numerous reasons why a tax-free spin-off is not possible. These have included, among others, issues regarding capital structure, acquisition safe harbors, reimbursement concentration and taxation. We have researched each of management's expressed objections extensively and have concluded there appear to be no insurmountable obstacles. A spin-off of one of Chemed's businesses would be relatively simple, in our opinion, given Chemed's discrete operating structure and minimal shared resources, and would produce two viable, self-funding, pure-play independent public companies, each with critical mass in today's stock market. We recognize that today the equity markets are turbulent and the M&A environment is moribund. However, even if Chemed decided to spin-off one of its subsidiaries, a transaction would not take place until later this year. Planning, structuring and executing a tax-free spin-off takes several quarters and therefore the present weakness of capital markets is no excuse not to begin the process.
We believe that a tax-free spin-off would have numerous significant business benefits, in addition to the benefits to stockholders, including increased management focus on each business's needs rather than those of its parent company, separate access to equity and debt capital markets, improved employee incentive programs through equity compensation plans more closely aligned to the performance of each business and potential for a higher valued equity currency to compete in the M&A market. In the past, the Board has recognized the benefits to Chemed and its stockholders of strategic divestitures, as with Patient Care, Dubois Chemicals and Omnicare. We have heard management's views and disagree. Now we want to know the Board's view of the potential benefits to Chemed of immediately pursuing a tax-free spin-off, both in terms of public market value and the creation of the potential for value maximizing transactions. We would appreciate a prompt response on behalf of the Board, and are available in the meantime to discuss our views in greater detail. I can be reached at (212) 586-4333.
cc: David Williams, Chief Financial Officer
Potential Spin-Off Value Assuming Trading Comp Multiples ($in millions, except per share data) Vitas (a) Roto-Rooter (a) TOTAL 2008 2009 2008 2009 2008 2009 Spin-Off Valuation ------------------ Adjusted EBITDA (b) $104.8 $115.2 $56.9 $54.8 $161.7 $170.1 Trading Comp Multiples (c) 9.1x 7.5x 11.7x 11.1x 10.0x 8.7x Implied Enterprise Value $953.7 $864.3 $665.4 $608.5 $1,619.1 $1,472.8 Net Debt (cash) (d) 210.4 210.4 - - 210.4 210.4 Shares 22.8 22.8 22.8 22.8 22.8 22.8 Equity Value per Share $32.58 $28.66 $29.16 $26.67 $61.74 $55.33 Potential Spin-Off Value Assuming Transaction Multiples ($in millions, except per share data) Vitas (a) Roto-Rooter (a) TOTAL 2008 2009 2008 2009 2008 2009 Spin-Off Valuation ------------------ Adjusted EBITDA (b) $104.8 $115.2 $56.9 $54.8 $161.7 $170.1 Transaction Multiples (e) 10.8x 9.8x 12.1x 11.7x 11.3x 10.4x Implied Enterprise Value $1,131.9 $1,129.4 $688.1 $641.4 $1,820.1 $1,770.8 Net Debt (cash) (d) 210.4 210.4 - - 210.4 210.4 Shares 22.8 22.8 22.8 22.8 22.8 22.8 Equity Value per Share $40.38 $40.27 $30.16 $28.11 $70.54 $68.38 Notes: (a) Assumes a tax-free spin-off where Vitas retains the attractively priced 1.875% convertible notes due 2014. (b) Segment EBITDA estimates are an average of Oppenheimer and Deutsche Bank estimates for 2008 and 2009. Corporate expenses allocated based on revenue. (c) Based on closing prices on February 9, 2009. Vitas trading comps include Almost Family, Amedisys, Gentiva, LHC Group and Odyssey. Roto- Rooter trading comp is Rollins. (d) Represents Chemed's total debt less cash as of September 30, 2008. (e) Vitas transaction comps include hospice transactions with greater than $50mm enterprise values in the last five years. Roto-Rooter transaction comps include residential and commercial services deals in the last five years with greater than $50mm enterprise values. LTM multiples applied to 2008 and 1-year forward multiples applied to 2009.
This analysis was prepared by MMI solely for purposes of illustrating MMI's position with respect to a possible spin-off of one of Chemed's businesses and it may not be relied on by any other person or used for any other purpose. While MMI believes that the segment EBITDA estimates of third party firms referenced in this analysis reflect those firms' best judgments on the dates those estimates were reported, MMI has not independently reviewed the assumptions underlying those estimates or the risks and uncertainties to which those estimates are subject. In this analysis, MMI has relied upon and assumed, without independent verification, the accuracy and completeness of all the financial and other information obtained by MMI from publicly available sources. Any estimates or projections for Chemed, Vitas or Roto-Rooter contained in this analysis involve numerous and significant subjective determinations, which may or may not prove to be correct. No representation or warranty, express or implied, is made as to the accuracy or completeness of any such information and nothing contained in this analysis is, or shall be relied upon as, a representation, whether as to the past or the future. This analysis reflects MMI's best current judgment and reflects assumptions MMI believes to be reasonable based on currently available information. However, this analysis does not purport to address all potential alternatives, the relative merits of different alternatives or all risks, uncertainties or assumptions associated therewith. The assumptions made in connection with this analysis are necessarily based on economic, market, financial and other conditions as they existed, and on the information publicly available to MMI, as MMI prepared this analysis and MMI undertakes no obligation to update or otherwise revise this analysis.
|SOURCE MMI Investments, L.P.|
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