A shake-up on Cardinal Well being’s board might pave the way in which for activist fund Elliott to create worth

Enterprise: Cardinal Well being is a distributor of prescribed drugs, a worldwide producer and distributor of medical and laboratory merchandise, and a supplier of efficiency and information options for health-care amenities. The corporate operates by two segments: (i) pharmaceutical and (ii) medical provide and distribution. The pharmaceutical phase has roughly $165 billion in income (91%) and the medical phase has roughly $16 billion (9%) in income. The corporate is the smallest of the highest three largest drug distributors (who collectively make up 90% of the market), behind AmerisourceBergen and McKesson. 

Inventory Market Worth: ~$19B ($69.89 per share)

Share Possession: n/a

Common Price: n/a

Activist Commentary: Elliott is a really profitable and astute activist investor, notably within the expertise sector. Their staff contains analysts from main tech personal fairness corporations, engineers and working companions. When evaluating an funding, additionally they rent specialty and common administration consultants, professional value analysts and business specialists. They usually watch firms for a few years earlier than investing and have an in depth secure of spectacular board candidates.

On Sept. 6, Elliott and the corporate entered right into a cooperation settlement, pursuant to which Cardinal agreed to nominate the next 4 director nominees to the board and nominate them for election on the 2022 Annual Assembly: (i) Steven Ok. Barg, international head of engagement at Elliott Administration; (ii) Michelle M. Brennan, chair of Join Healthcare Council for Pioneering Collective and board member of Coupa Software program; (iii) Sujatha Chandrasekaran, an advisor and unbiased advisor within the analysis and expertise sectors; and (iv) Christine A. Mundkur, former CEO and non-voting chairman of the board for Impopharma, a developer of advanced formulations targeted on inhalation pharmaceutical merchandise. The corporate expanded the dimensions of the board from 11 to fifteen. Following the 2022 annual assembly, incumbent administrators Dean Scarborough and John Weiland will resign, and the board shall be 13 members. Moreover, Cardinal agreed to kind a brand new enterprise overview committee to help a complete overview of its technique, portfolio, capital-allocation framework, and operations. The committee shall be chaired by CEO Jason Hollar, and Barg and Akhil Johri may also serve there. Elliott agreed to abide by sure customary voting and standstill provisions.

Cardinal is an organization that consists of two companies with no actual synergies. The pharmaceutical enterprise is one in every of three firms in an oligopoly and is rising sooner than its friends, rising income by 14% final yr. Pharmaceutical friends commerce at 10 to 11 occasions EBITDA whereas Cardinal is buying and selling at simply 8 occasions EBITDA. That is due to operational points and missteps, primarily within the medical phase. They made the error of sinking cash into this phase by acquisitions however have been by no means in a position to function these belongings. Now this phase has about $16 billion of income, however was unprofitable this previous quarter after traditionally having as much as $800 million in EBITDA.

There are a number of alternatives for worth creation right here. This could begin with promoting off some non-core belongings. Within the pharmaceutical enterprise, Nuclear and Precision Well being Options is an unrelated market-leading asset that could possibly be spun off. Within the medical enterprise, Cardinal Well being at-House Options, which the corporate purchased a decade in the past, has grown properly and is in a ripe marketplace for acquisition. This might give Cardinal money to repair up the 2 companies after the corporate has missed EPS steering six quarters in a row.

Nevertheless, all of those initiatives needs to be achieved with a reconstituted board. That was made clear in August when Cardinal announced that Mike Kaufmann (who had a 30-year tenure on the firm) was stepping down as CEO and can be succeeded by CFO Jason Hollar. The transfer got here with no warning or communication, and the board promoted the CFO to the CEO place. In the meantime, Hollar has by no means labored in well being care earlier than Cardinal, the place he has been for less than 2.5 years. He was most lately CFO at Tenneco, an auto components firm, and at Sears Holdings earlier than that. One of many foremost capabilities of a company board is to investigate and impact CEO succession. It seems that the Cardinal board simply phoned this one in. Hollar could be the proper CEO for the corporate, however this transition ought to solely occur after a full search course of. Furthermore, inner CEO succession usually makes extra sense for a corporation that’s doing nice and the manager is able to retire, not an organization that’s an underperformer and abruptly components methods with its chief.

The opposite, and perhaps most suitable choice, for this firm is a strategic overview. Final yr, a bunch of personal fairness corporations teamed as much as purchase Medline Industries, a direct competitor to Cardinal’s medical enterprise, for $34 billion. With $20 billion in income, Medline is just a little greater than Cardinal’s enterprise. We aren’t implying that Cardinal’s medical division is value anyplace close to that, however Cardinal’s total firm enterprise worth is simply $20 billion and Medical is the a lot smaller division. Furthermore, on the 10 to 11 occasions EBITDA a number of that Cardinal’s pharmaceutical friends get, its pharmaceutical division’s $2 billion of EBITDA could possibly be value roughly $20 billion to $22 billion, attributing unfavourable worth to the medical division.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and he’s the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire can also be the creator of the AESG™ funding class, an activist funding type targeted on enhancing ESG practices of portfolio firms.