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OMB
APPROVAL
OMB
Number: 3235-0145
Expires:
February 28, 2009
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
SCHEDULE
13D
THE
SECURITIES EXCHANGE ACT OF 1934
(Amendment
No. 2)
MDS
Inc.
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(Name
of Issuer)
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Common
Shares, no par value
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(Title
of Class of Securities)
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Obrem
Capital Management, LLC
733
3rd Avenue
11th
Floor
New
York, New York 10017
Telephone -
(646) 454-5311
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(Name,
Address and Telephone Number of Person Authorized to Receive
Notices
and Communications)
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June
26, 2008
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(Date
of Event Which Requires Filing of this
Statement)
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If
the filing person has previously filed a statement on Schedule 13G to
report the acquisition that is the subject of this Schedule 13D, and is
filing this schedule because of ss.240.13D-1(e), 240.13d-1(f) or
240.13d-1(g), check the following box [ ].
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Note: Schedules
filed in paper format shall include a signed original and five copies of
the schedule, including all exhibits. See § 240.13d-7 for
other parties to whom copies are to be sent.
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* The
remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which
would alter disclosures provided in a prior cover
page.
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The
information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of
that section of the Act but shall be subject to all other provisions of
the Act (however, see the Notes).
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1.
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NAME
OF REPORTING PERSONS
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I.R.S.
IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
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Obrem
Capital Management, LLC
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2.
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CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
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(a)
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[_]
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(b)
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[
_
]
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5.
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CHECK
BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d)
OR 2(e)
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[_]
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6.
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CITIZENSHIP
OR PLACE OF ORGANIZATION
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Delaware
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NUMBER
OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON
WITH
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8.
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SHARED
VOTING POWER
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6,415,600
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9.
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SOLE
DISPOSITIVE POWER
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0
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10.
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SHARED
DISPOSITIVE POWER
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[_]
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6,415,600
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11.
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AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
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PERSON
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6,415,600
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12.
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CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
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CERTAIN
SHARES*
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13.
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PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
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5.3%
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14.
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TYPE
OF REPORTING PERSON
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OO
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1.
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NAME
OF REPORTING PERSONS
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I.R.S.
IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
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Obrem
Capital (GP), LLC
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2.
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CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
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(a)
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[_]
|
|
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(b)
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[
_
]
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5.
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CHECK
BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d)
OR 2(e)
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[_]
|
|
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6.
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CITIZENSHIP
OR PLACE OF ORGANIZATION
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Delaware
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NUMBER
OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON
WITH
|
|
|
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8.
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SHARED
VOTING POWER
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|
|
|
|
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6,415,600
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9.
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SOLE
DISPOSITIVE POWER
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0
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10.
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SHARED
DISPOSITIVE POWER
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[_]
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6,415,600
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11.
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AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
|
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|
PERSON
|
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|
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6,415,600
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12.
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CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
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CERTAIN
SHARES*
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|
|
|
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13.
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PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
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5.3%
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14.
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TYPE
OF REPORTING PERSON
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OO
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1.
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NAME
OF REPORTING PERSONS
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I.R.S.
IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
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Andrew
Rechtschaffen
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2.
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CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
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(a)
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[_]
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|
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(b)
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[_]
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5.
|
CHECK
BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d)
OR 2(e)
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[_]
|
|
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6.
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CITIZENSHIP
OR PLACE OF ORGANIZATION
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United
States of America
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NUMBER
OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON
WITH
|
|
|
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8.
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SHARED
VOTING POWER
|
|
|
|
|
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6,415,600
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9.
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SOLE
DISPOSITIVE POWER
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|
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0
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10.
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SHARED
DISPOSITIVE POWER
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[_]
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6,415,600
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11.
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AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
|
|
|
PERSON
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6,415,600
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12.
|
CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
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CERTAIN
SHARES*
|
|
|
|
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13.
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PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
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5.3%
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14.
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TYPE
OF REPORTING PERSON
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IN
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1.
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NAME
OF REPORTING PERSONS
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I.R.S.
IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
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Obrem
Capital Offshore Master, L.P.
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2.
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CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
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|
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(a)
|
[_]
|
|
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(b)
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[_]
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5.
|
CHECK
BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d)
OR 2(e)
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|
[_]
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|
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6.
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CITIZENSHIP
OR PLACE OF ORGANIZATION
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Cayman
Islands
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NUMBER
OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON
WITH
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8.
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SHARED
VOTING POWER
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3,663,660
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9.
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SOLE
DISPOSITIVE POWER
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0
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10.
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SHARED
DISPOSITIVE POWER
|
|
[_]
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3,663,660
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11.
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AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
|
|
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PERSON
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3,663,660
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12.
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CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
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|
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CERTAIN
SHARES*
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|
|
|
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13.
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PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
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3.0%
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14.
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TYPE
OF REPORTING PERSON
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PN
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1.
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NAME
OF REPORTING PERSONS
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I.R.S.
IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
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Obrem
Capital (QP), L.P.
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2.
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CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
|
|
|
(a)
|
[_]
|
|
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(b)
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[_]
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5.
|
CHECK
BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d)
OR 2(e)
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|
[_]
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|
|
|
|
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6.
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CITIZENSHIP
OR PLACE OF ORGANIZATION
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|
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|
|
|
Delaware
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NUMBER
OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON
WITH
|
|
|
|
8.
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SHARED
VOTING POWER
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|
|
|
|
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2,751,940
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9.
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SOLE
DISPOSITIVE POWER
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0
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10.
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SHARED
DISPOSITIVE POWER
|
|
[_]
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2,751,940
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11.
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AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
|
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PERSON
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2,751,940
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12.
|
CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
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CERTAIN
SHARES*
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|
|
|
|
13.
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PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
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2.3%
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14.
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TYPE
OF REPORTING PERSON
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PN
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Item
1.
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Security
and Issuer.
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Item
2.
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Identity
and Background.
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Item
3.
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Source
and Amount of Funds or Other Consideration.
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The
funds for the purchase of the Shares beneficially owned by the Reporting
Persons came from the working capital of the private investment vehicles
managed by the Reporting Persons.
The
total cost for the Shares that Obrem Capital Offshore Master,
L.P. may be deemed to beneficially own is $68,119,673
(CAD). The total cost for the Shares that Obrem Capital (QP),
L.P. may be deemed to beneficially own is $51,147,998
(CAD).
No
borrowed funds were used to purchase the Shares, other than any borrowed
funds used for working capital purposes (including certain leverage
arrangements) in the ordinary course of business.
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Item
4.
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Purpose
of Transaction.
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The
Reporting Persons purchased the Shares based on the Reporting Persons'
belief that the Shares, when purchased, were undervalued and represented
an attractive investment opportunity. Depending upon overall
market conditions, other investment opportunities available to the
Reporting Persons, and the availability of Shares at prices that would
make the purchase of additional Shares desirable, the Reporting Persons
may endeavor to increase their position in the Issuer through, among other
things, the purchase of Shares on the open market or in private
transactions or otherwise, on such terms and at such times as the
Reporting Persons may deem advisable.
On
April 9, 2008, the Reporting Persons delivered a letter to the Issuer’s
Board of Directors (the “Board”) expressing the Reporting Persons' desire
to discuss the Issuer’s business, other strategic and financial
considerations and the Reporting Persons’ recommendations to increase
permanent shareholder value.
On
May 15, 2008, the Reporting Persons met with the Board and discussed the
Reporting Persons’ view that shares of the Issuer remain significantly
undervalued and near-term steps that the Reporting Persons believe should
be taken in order to create permanent shareholder value.
On
June 26, 2008, the Reporting Persons delivered a letter to the Board
expressing the Reporting Persons' desire to maintain a dialogue with the
Board and calling on the Issuer to increase shareholder
value. The June 26, 2008 letter also set forth specific actions
that the Reporting Persons believe the Issuer and its Board should
consider in order to increase shareholder value. A copy of the
letter sent to the Board dated June 26, 2008, is attached hereto as
Exhibit B.
In
addition to the actions set forth above, in connection with their
investment in the Shares of the Issuer, the Reporting Persons may engage
in additional communications with members of management and the board of
directors of the Issuer, other current or prospective shareholders,
industry analysts, existing or potential strategic partners or
competitors, investment and financing professionals, sources of credit and
other investors with respect to the types of corporate action that may be
covered in paragraphs (a) through (j) of Item 4 of Schedule
13D. The Reporting Persons intend to review their investment in
the Issuer on a continuing basis. Depending on various factors
including, without limitation, the Issuer's financial position and
investment strategy, the price levels of the Shares, conditions in the
securities markets and general economic and industry conditions, the
Reporting Persons may in the future take such actions with respect to
their investment in the Issuer as they deem appropriate including, without
limitation, seeking board representation, making proposals to the Issuer
concerning changes to the capitalization, ownership structure or
operations of the Issuer, purchasing additional Shares, selling some or
all of their Shares, engaging in short selling of, or any hedging or
similar transaction with respect to, the Shares or changing their
intention with respect to any and all matters referred to in this Item
4.
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Item
5.
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Interest
in Securities of the Issuer.
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(a)-(e)
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As
of the date hereof, Obrem Capital Management, LLC, Obrem Capital (GP), LLC
and Andrew Rechtschaffen may be deemed to be the beneficial owner of
6,415,600 Shares or 5.3% of the Shares of the Issuer, based upon the
122,036,150 Shares outstanding as of April 30, 2008, according to the
Issuer's most recent Interim Report. As of the date hereof,
Obrem Capital Offshore Master, L.P. may be deemed to be the beneficial
owner of 3,663,660 Shares or 3.0% of the Shares of the Issuer. As of
the date hereof, Obrem Capital (QP), L.P. may be deemed to be the
beneficial owner of 2,751,940 Shares or 2.3% of the Shares of the
Issuer.
Each
of Obrem Capital Management, LLC, Obrem Capital (GP), LLC and Andrew
Rechtschaffen has the sole power to vote or direct the vote of 0
Shares and the shared power to vote or direct the vote of
6,415,600 Shares. Obrem Capital Offshore Master, L.P. has
the sole power to vote or direct the vote of 0 Shares and the shared power
to vote or direct the vote of 3,663,660 Shares. Obrem Capital
(QP), L.P. has the sole power to vote or direct the vote of 0 Shares and
the shared power to vote or direct the vote of
2,751,940 Shares.
Each
of Obrem Capital Management, LLC, Obrem Capital (GP), LLC and Andrew
Rechtschaffen has the sole power to dispose or direct the disposition
of 0 Shares and the shared power to dispose or direct the disposition of
6,415,600 Shares. Obrem Capital Offshore Master, L.P. has
the sole power to dispose or direct the disposition of 0 Shares and the
shared power to dispose or direct the disposition of 3,663,660
Shares. Obrem Capital (QP), L.P. has the sole power to dispose
or direct the disposition of 0 Shares and the shared power to dispose or
direct the disposition of 2,751,940 Shares.
No
Shares were purchased during the past 60 days by the Reporting
Persons.
The
Shares were acquired for investment purposes. Obrem Capital
Management, LLC, Obrem Capital (GP), LLC, Andrew Rechtschaffen, Obrem
Capital Offshore Master, L.P. and Obrem Capital (QP), L.P. may acquire
additional Shares, dispose of all or some of these Shares from time to
time, in each case in open market or private transactions, block sales or
purchases or otherwise, or may continue to hold the Shares.
The
Reporting Persons specifically disclaim beneficial ownership in the Shares
reported herein except to the extent of their pecuniary interest
therein.
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Item
6.
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Contracts,
Arrangements, Understandings or Relationships with Respect
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to
Securities of the Issuer.
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The
Reporting Persons have entered into agreements with several credit
counterparties relating to cash settled equity swaps (the “Swap
Agreements”) relating to the Issuer’s common shares. The Swap
Agreements provide the Reporting Persons with economic exposure to
approximately 2.2% of the Issuers’ issued and outstanding common
shares. These agreements do not confer on the reporting persons
any direct or indirect voting or dispositive control of any of the
Issuer’s common shares. The Reporting Person disclaim any
beneficial ownership over any of the Issuer’s common shares as a result of
being party the Swap Agreements.
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Item
7.
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Material
to be Filed as Exhibits.
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A. An
agreement relating to the filing of a joint statement as required by Rule
13d-1(f) under the Securities Exchange Act of 1934 is filed herewith as
Exhibit A.
B. The
June 26, 2008 letter to the Board of Directors of the Issuer is filed
herewith as Exhibit B.
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SIGNATURE
After
reasonable inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and
correct.
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Obrem
Capital Management, LLC
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
Obrem
Capital (GP), LLC
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
Andrew
Rechtschaffen
/s/ Andrew
Rechtschaffen
Obrem
Capital Offshore Master, L.P.
By: Obrem
Capital (GP), LLC, its general partner
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
Obrem
Capital (QP), L.P.
By: Obrem
Capital (GP), LLC, its general partner
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
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Attention: Intentional
misstatements or omissions of fact constitute Federal criminal violations (see
18 U.S.C. 1001).
Exhibit
A
AGREEMENT
The undersigned agree that this amended
Schedule 13D dated June 26, 2008, relating to the Common Stock, no par value, of
MDS Inc. shall be filed on behalf of the undersigned.
June 26,
2008
-----------------------
(Date)
Obrem
Capital Management, LLC
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
Obrem
Capital (GP), LLC
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
Andrew
Rechtschaffen
/s/ Andrew
Rechtschaffen
Obrem
Capital Offshore Master, L.P.
By: Obrem
Capital (GP), LLC, its general partner
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
Obrem
Capital (QP), L.P.
By: Obrem
Capital (GP), LLC, its general partner
By:
/s/ Andrew
Rechtschaffen
Andrew
Rechtschaffen, Managing Member
Exhibit
B
The June
26, 2008 letter to the Board of Directors of the Issuer
MDS
Inc.
2700
Matheson Blvd. East
Suite
300, West Tower
Mississauga,
Ontario
Canada
L4W 4V9
MDS Inc.
Management and Board of Directors, c/o:
John T.
Mayberry, Chairman of the Board
Stephen
P. DeFalco, Chief Executive Officer
June 26,
2008
Dear Sirs
and Madams:
Since
late February 2008, private investment funds managed by Obrem Capital
Management, LLC, or its affiliates ("Obrem") acquired and now own approximately
6.4mm shares of MDS Inc. ("MDS" or the “Company"), representing approximately
5.3% of the Company’s outstanding shares. Obrem has also entered into
several cash settled equity swaps relating to the Company’s common shares that
give Obrem economic exposure to an additional approximately 2.2% of the
Company’s issued and outstanding common shares, as represented in Amendment 2 to
Obrem’s Schedule 13D filing. According to MDS' public filings, we are
among MDS' five largest shareholders. We acquired our stake in MDS because we
believed the Company's shares were significantly undervalued.
In a
Schedule 13D that we filed on April 9, 2008, and in subsequent communications
with members of management and the board of directors of MDS, we expressed our
view that shares of the Company remain significantly undervalued and that
near-term steps should be taken to create shareholder value. Specifically, we
recommended: (i) that MDS hire a financial adviser to review what valuations
could be achieved through the sale or spin-off of one or more of its business
units, and (ii) that management adjust the Company's under-leveraged capital
structure and pursue a significant share repurchase program.
Following
the disappointing second quarter results announced on June 5, 2008, we feel even
more strongly that MDS’ management and board of directors must take proactive
steps to create shareholder value. Our conversations with management
and the board of directors to date, while constructive, have not given us
comfort that they share shareholders’ strong interest in seeing value unlocked
in the near term.
We
believe MDS is comprised of three fundamentally attractive business units that
do not belong together. During our work researching MDS and speaking
with industry experts, analysts, and management, we have not heard any
compelling arguments for keeping these businesses unified under a single
corporate structure. We do not see any reason why MDS Pharma
Services’ return to profitability is enhanced or expedited by being a part of
the current MDS corporate structure, and we similarly believe that any
uncertainties surrounding MDS Nordion can be resolved as a stand-alone
company.
We
believe the current structure has led to a persistent ‘conglomerate discount’
for shares of MDS, which trade below what we believe is the intrinsic value of
the individual businesses. Furthermore, the disappointing second
quarter results have served to further exacerbate the discount, as investors who
might be comfortable with one of MDS’ businesses may have become ‘scared off’ by
problems and poor execution in a different segment. The discount may
have expanded further as a result of the company’s failure to achieve guidance
given just three months earlier.
MDS
shareholders have waited patiently while the share price has produced
disappointing returns. Though present management has taken some
shareholder-friendly actions during its tenure, including the divestiture of MDS
Diagnostic Services and other non-core assets, and the significant share
repurchase program in early 2007, it has not created significant, lasting
shareholder value. Since present management took the helm on July 1, 2005,
NYSE-traded shares of "MDZ" have risen from $15.21 to $16.09, an annualized
share price increase of 1.9%. During the same time period, shares of certain
peer contract research organizations
1
achieved annualized share price increases of
21.4%, and shares of certain peer instrument manufacturers
2
achieved annualized share price increases of
23.8%. Simply put, we believe MDS’ share price performance has been unacceptable
given the quality of the businesses that the Company operates and the
performance of comparable companies in similar industries. The
disappointment is intensified given that we believe tangible, straightforward
steps could be taken to release significant value for shareholders by resolving
the conglomerate discount.
Our core
recommendation to the Company is to proceed with the dissolution of the
conglomerate structure at MDS via a sale or spin-off of one or more business
units. There are many possible scenarios in this approach. The
one which we believe is most compelling is to separate all three businesses
through a tax-efficient 'Butterfly transaction', which would lead to the
distribution of shares in each of MDS’ businesses to current MDS
shareholders. Under this scenario, we believe the three independent,
free-trading businesses could be valued in the public markets in the following
way:
|
|
-
|
MDS
Pharma Services could continue its recovery and margin improvement outside
the current conglomerate structure without altering its path towards
greater profitability. The most compelling argument for keeping
MDS Pharma Services joined to the other divisions has been its potential
need for an external cash source. We believe this could be
addressed both through proper initial capitalization of MDS Pharma
Services from the parent company, as well as the prospective raising of
additional equity capital from financial sponsors at the time of the
Butterfly transaction (i.e. a ‘sponsored spin’). At what we
believe to be a very conservative valuation of 1.0x 2009E revenue, we
estimate this business would be valued at a minimum of $577
million.
|
|
|
-
|
MDS
Nordion, which has a reliable cash flow stream but some longer-term
uncertainties, could distribute all of its after-tax free cash flow
through dividends as a stand-alone public company. With
estimated after-tax free cash flow of approximately $52 million in 2009,
and with the assumption of a dividend yield of 5 – 5.5%, we believe this
business would be valued at approximately $1.0 billion. Even in a highly
conservative scenario, which assumes the NRU reactor's license is extended
only through 2016 and that MDS Nordion makes no effort to replace this
revenue stream thereafter, MDS Nordion is still worth more than $800
million on a discounted cash flow basis. Also, applying a
multiple of between 9.0x and 11.0x
3
to our 2009E EBITDA of $91 million implies
a value of between $800 million and $1.0 billion.
|
-
|
MDS
Analytical Technologies, despite a challenging pharmaceutical spending
environment, is the premier manufacturer of mass spectrometers and other
drug discovery platforms. Based on 2009E EBITDA of $100 million (which
assumes reasonable revenue growth and EBITDA margins of approximately 20%,
below the company’s long term guidance range of 21 – 24%) and peer trading
multiples of 12.0x – 13.0x EBITDA, we believe this business is
conservatively worth $1.2 billion.
|
-
|
We
value corporate expense at $(192) million by placing an 8.0x EBITDA
multiple on annual corporate spend of $(24) million. The
resulting enterprise value of the three segments and the offsetting
corporate expense is approximately $2.6 billion.
|
-
|
We
believe MDS has net cash of $36 million, which includes: debt of $300
million, cash of $139 million, notes receivable of $73 million, financial
instruments pledged as security on long-term debt of $42 million, long
term notes receivable of $40 million, available for sale investments of
$16 million, and small additional adjustments made for deferred pension
assets and other long term investments.
4
|
-
|
We
incorporate two other items in our valuation. First, we assume
that $50 million of working capital can be recovered from the $71 million
absorbed by the business during the first half of the year (excluding the
impact of the $57 million tax payment in the first quarter related to the
sale of MDS Diagnostic Services). Second, we assume a $150 million
settlement from AECL regarding the cancelled MAPLE reactors. We believe
this estimate, which has been reported in the press, is conservative as it
represents less than half of MDS' $346 million carried interest in the
project.
|
1
The peer
group of contract research organizations is comprised of Charles River, Covance,
Icon, Kendle, Parexel, PharmaNet Development, and PPD. Not included
are LAB Research, which conducted its initial public offering in 2006, and PRA
International, which was acquired in 2007 by Genstar Capital.
2
The peer
group of instrument manufacturers, which includes makers of analytical
instruments and drug screening and discovery tools, is comprised of Bruker,
Millipore, PerkinElmer, Thermo Fisher Scientific, and Waters. Not
included is Applied Biosystems, which announced on June 12, 2008, that it will
be acquired by Invitrogen.
3
Though
this business has no clear comparable companies, research analysts have
typically valued MDS Nordion within this range.
4
Details
on Long-Term Investments and Other can be found on page 39 of MDS’ most recent
interim statement.
-
|
Together,
these balance sheet items, working capital recovery, and expected MAPLE
settlement total $236 million of estimated pro forma net cash, bringing
the equity value of MDS to over $2.8 billion, or $23.11 per share.
(Notably, if MDS Pharma Services were accorded a valuation at the low end
of the range of its peer group, or 1.5x revenue, this would add an
incremental $289 million of value, or $2.36 per share. Both
scenarios are shown in Table 1.)
|
|
|
|
|
|
|
|
Valuation
assuming
|
|
MDS
Pharma Services
|
|
2009E
revenue multiple of:
|
$
in millions, except per share values
|
1.0x
|
1.5x
|
MDS
Pharma Services
|
$577
|
$866
|
MDS
Nordion
|
1,000
|
1,000
|
MDS
Analytical Technologies
|
1,200
|
1,200
|
Corporate
|
(192)
|
(192)
|
Enterprise
Value
|
$2,585
|
$2,874
|
Less:
Debt
|
(300)
|
(300)
|
Plus:
Cash
|
139
|
139
|
Plus:
Notes Receivable
|
73
|
73
|
Plus:
Long-Term Investments
|
124
|
124
|
Plus:
WC Recovery
|
50
|
50
|
Plus:
MAPLE Settlement
|
150
|
150
|
Pro
Forma Net Cash
|
236
|
236
|
Market
Capitalization
|
$2,821
|
$3,109
|
Shares
Outstanding
|
122
|
122
|
Per
Share Value
|
$23.11
|
$25.48
|
%
Premium to Current Price of $16.09
|
43.6%
|
58.3%
|
We
believe this valuation approach is conservative across all three segments, most
notably in MDS Pharma Services, which we are confident will eventually achieve
industry-level margins and a much richer valuation. In the meantime, with a $23
per share value (or greater) easily within reach, we believe it is incumbent
upon management and the board to proactively unlock this unrealized
value.
It is
also important to note that under this scenario MDS shareholders preserve their
exposure to all of the potential value creation from improvement in MDS’
underlying businesses. By separating and distributing the businesses
through a Butterfly transaction, MDS shareholders will retain a stake in each of
the three businesses and participate directly in their future upside and
improvement. Only if one or more businesses were sold in a
tax-inefficient manner could value be permanently transferred away from MDS
shareholders.
We also
call upon management and the board of directors to increase their personal
holdings in the shares of MDS. We are disappointed that members of
the board of directors, excluding Stephen DeFalco, personally own only 37,750
common shares and 207,124 Deferred Share Units, and that members of management,
including Stephen DeFalco, collectively own only 8,650 common shares and 566,658
Restricted, Performance, and Deferred Share units.
5
All together, members of the board
of directors and management personally own a total of 820,182 common shares and
Restricted, Performance, and Deferred Share Units, representing 0.67% of the
Company’s outstanding shares. We believe this limited amount of
ownership by the Company’s leadership creates a potential misalignment of
incentives and perspective on what actions should be taken and
when.
We
believe that the course of action described above, or one similar to it, is in
the best interest of all MDS shareholders. We call on the Company to
proceed with the dissolution of the conglomerate structure immediately, via the
scenario described above or other possible break-up scenarios recommended by
financial advisors. We also call on the Company to aggressively
pursue its share repurchase program in order to take advantage of current,
substantially discounted market prices.
We are
currently reviewing potential courses of action, including calling a special
meeting of shareholders to allow a more direct expression of views to management
and the board of directors. We trust that the Company will act in the
best interest of shareholders and will heed their wishes regarding MDS’
strategic course, with a focus on maximizing shareholder
value. Throughout this process we hope to maintain a constructive and
respectful dialogue with management and the board of directors, with minimal
expense and distraction for the Company and its employees.
Sincerely,
Andrew
Rechtschaffen
Obrem
Capital Management, LLC
5
Then
number of shares held by the board of directors and management is based on the
2008 Annual Meeting Proxy Circular filed on January 29, 2008. The
number of shares held by the board of directors excludes shares held by CEO
Stephen DeFalco, shares held personally by Gregory Spivy and William Dempsey,
who were appointed to the board of directors in April 2008, shares held by
ValueAct Capital Management, which is represented on the board of directors by
Gregory Spivy, and shares held by Enterprise Capital Management, which is
represented on the board of directors by James MacDonald.
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