Thursday, February 8, 2024

Enzo Biochem: Asset Sale, Cheap RemainCo Likely for Sale

Enzo Biochem (ENZ) (~$65MM market cap) in July 2023, closed on the sale of their clinical laboratory division to Labcorp (LH) leaving their subscale but growing Enzo Life Sciences ("ELS") division and a slug of cash at the RemainCo.  Rhyming with other similar setups (most recently PFSW), the company is likely dressing up the ELS division for sale to complete the two-step liquidation of the company.  The ELS segment makes products (picks and shovels for biotechs) for drug development and clinical research, it does about $32MM in sales annually making it an after-thought in the large but mid-to-high single digit growing industry.  Today ELS is roughly breakeven before corporate overhead, while that should improve, after corporate overhead, ENZ as a whole, is burning cash and has little reason to exist.

Comparables of similar size (most are profitable mid-large caps) are a bit hard to come by for the ELS segment (there might be obvious ones that I'm missing, if so, please point them out in the comments), but they do own the real estate for the business (about 56,000 square feet of manufacturing/research space in Farmingdale, NY), just throwing a basic 1x TTM revenue multiple on the ELS business itself and adding the PPE, gets me about a value of $45MM for the remaining business.  Adding in the current NCAV and accounting for further cash burn, I get a proforma value of approximately $1.75/share.

In a bullish scenario, maybe they can get upward of 2x revenue for the ELS segment and it could be a near double from current prices.  This isn't a unique idea, but as I've said before, I think investors tend to be impatient with these setups, it takes longer than investors would think to unwind the operations of segments that on the surface look separate.  As we come up on the first anniversary of the clinical labs sale, a second asset sale in the next quarter or two is a more reasonable timeline.

Other random thoughts:

  • Enzo's former clinical laboratory segment was subject to a ransomware attack last May prior to the close of their deal with Labcorp, lots of sensitive information was stolen including several hundred thousand social security numbers.  Enzo is facing some lawsuits, but hasn't provided any estimated liability at this point.
  • Enzo stopped doing earnings calls after the asset sale announcement, they haven't returned to conducting earnings calls, pointing to their current structure not being the long term model going forward.
  • Steven Pully is the new Chairman of the Board, he's a partner/co-founder of Speyside Partners, an advisory shop that specializes in businesses in transition, he's served on 29 boards, including several that ended up pseudo liquidating, similar to ENZ's presumed path.
  • What's the "ADES risk" here?  Said otherwise, what's the risk the company will be a buyer rather than a seller?  I think that's unlikely since the board and shareholder registry is filled with value and activist investors who have shown up in the last two years, are not emotionally tied to the business like a former founder or CEO.
  • Bradley Radoff, a private investor, owns 8+% of the stock and is on the board of directors.
  • CEO Kara Cannon was previously the COO, after the former CEO stepped down 9/6 she took on the interim CEO title that was later graduated to the permanent CEO.  Her contract will pay her a 0.75% Transaction Bonus on the any sale incentivizing her to go along with the two-step liquidation strategy.

Disclosure: I own shares of ENZ

19 comments:

  1. Another one Radoff is involved with (GHSI) just agreed to sell its operating business. After accounting for warrant dilution it seems to be trading at a significant discount to cash. Fair warning it’s really small.

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    1. Thanks, agree, looks interesting.

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    2. I'm late to this GHSI idea but mind if I ask how you’re thinking about it? I think there's a good chance they get 50% approval at the first special meeting and if not, a very good chance they push it through eventually. They had 43% of shareholders cast votes at the last AGM for election of directors in November 2023. I would think they could find another 7%, given merger arbs have had time to enter and they sent a letter urging all shareholders to vote. Other similar names I looked at that had trouble pushing through liquidations had much less shareholder engagement at pre-deal AGMs (TMBR – 26% - went bankrupt, FRTX – 32% - still pending has failed to get 50% multiple times, VYNT – 36% - failed first time but pushed through within a few months). I also wonder if there is a scenario where if the first vote fails, the large warrant holders could exercise their warrants and then vote through the deal. Are there other major risks besides getting the votes that I'm missing?

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  2. Thanks MDC for flagging the idea and for thoughtful write-up.

    As far as comps go, the Danaher/Abcam "Scheme Circular" (the UK's version of a Merger Proxy) from October 2023 offers a few interesting precedent transactions. Two in particular stand out due to their (relatively) recent timing and similar levels of revenue:

    1) Sartorius AG's acquisition of Albumedix (announced August 2022); represented a forward revenue multiple of 12.6x (£415MM EV on 2022E revenues of £33MM).

    2) Abcam's acquisition of BioVision (announced August 2021); represented a trailing revenue multiple of 11.8x ($340MM EV on 2020 revenues of $28.8).

    There are a few more transactions provided in the Circular that are all well north of 10x revenue. The transactions were compiled by Morgan Stanley. I will caveat that I have absolutely no experience in the space, so these comps could be wildly irrelevant, but even if haircut by 50%-67%, still represent a significant premium to where ENZ shares trade today.

    Perhaps explains why Mr. Wolf believed ENZ to be an attractive investment, putting up $14MM of his capital (which includes shares held by his spouse, a sibling, his three children, and his charitable foundation according to his most recently filed 13D/A) to acquire a ~10% stake in the business.

    Circular: https://otp.investis.com/clients/uk/abcamplc2/sec/sec-show.aspx?FilingId=16974085&Cik=0001492074&Type=PDF&hasPdf=1

    @MudlarkCapital on X


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    1. Financial Update:
      - ELS business continued to show improvement - Y/Y revenue growth accelerated and gross margins expanded meaningfully q/q.
      - Revs +14% y/y (+10% q/q) to $8.6MM, led by US +25%; TTM revs $32.8MM.
      - Gross margins 49.4%, +510 bps q/q, driven by fixed cost absorption, mix, and cost containment including RIF.
      - OpEx down 4% y/y and declined meaningfully as % of sales to 75%.
      - Cash declined $9.0MM q/q, but NCAV only declined $3.5MM. Net cash per share ~$1.10.
      - FCF was a use of $(9.2)MM, an improvement vs. $(13.6)MM in FQ1.

      Other Update:
      - Motion to dismiss Ransomware Attack class action suit is due 4/8/24.
      - Shares out + RSUs +2% q/q (incl. 150K RSUs issued subsequent to quarter end).
      - CEO was granted 150K RSUs on Feb 23; combined with existing shareholdings, she has ~275K shares of common and RSUs (also will receive a bonus equal to 0.75% of transaction value upon CIC).

      Target: $2.30/share (+90% to current as of 3/13/24)
      Catalyst: Sale of ELS business to strategic
      Timing: Announcement during FQE 7/31

      @MudlarkCapital on X

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    2. Thanks - I continue to like it and will likely add to it in the coming weeks as a couple other ideas roll off.

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  3. Pretty explicit comment in the Q4 results PDF:

    https://s22.q4cdn.com/567650046/files/doc_financials/2023/q4/MBIA-Inc-Reports-Full-Year-and-Fourth-Quarter-2023-Financial-Results.pdf

    "Our focus remains on resolving our PREPA exposure and then resuming the process to
    sell the Company.”

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    1. Saw that too. I did sell about half my position earlier this year, I'm curious what discount to book they'd take in a sale.

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  4. Just looking at Wolfe and Radoff average cost basis, is there a lot more upside than you anticipate here? Radoff and Wolfe both bought a large majority of his shares in the high 2's low 3's. And CEO has an incentive now for change in control. Sort of hoping ENZ drops a bit so i can pick up more shares

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    1. Potentially yes. Mudlark above thinks so, I'm not confident enough to assign a real multiple to the RemainCo business, but others might know the business or potential value better than me.

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    2. Related: Something I noticed in the March 10-Q (which I had missed when it was first added in the November 10-K) was this note in "Other Matters" related to Wolf:

      "On or about September 26, 2023, James G. Wolf, Individually and as the Trustee of the Wolf Family Charitable Foundation, Barbaranne R. Wolf, Stephen Paul Wolf, and Preston M. Wolf initiated an appraisal action against Enzo Biochem, Inc. in the New York Supreme Court for Suffolk County. Petitioners seek an appraisal of the value of their shares in the Company. The amount of damages sought by the Petitioners is unspecified. The Company will defend itself vigorously in the appraisal action."

      I am not that familiar with appraisal actions (why they would be initiated, exposure to company, remedies for the initiator of the action). Reuters provides this description:

      "Also referred to as dissenters' rights. A statutory remedy available in many states to stockholders who object to certain extraordinary actions taken by the corporation (such as mergers). This remedy typically allows dissenting stockholders to require the corporation to repurchase their stock at a price equivalent to its fair market value immediately before the extraordinary corporate action."

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  5. This seems like a positive right? I don’t see how shareholders lose here regardless what happens in court?

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  6. Their cash burn is significantly higher than what you've earmarked (23m in q1 and q2) due to d/c'd ops, specifically mostly the payables/accrued liabilities. There's still about 13m of these liabilities through which they need to grind. I'm unsure how you originally calculated the cash burn, but seems to me it should be significantly higher. Thoughts?

    Additionally, and primarily due to the above, NCAV is now 52.6. Share count/market cap have risen a bit. On the bright side, revenues have increased. Seems overall a little less rosy to me.

    Question for you: Where did you find RSU numbers used in your original post? I see 50.489m SO, but am having trouble squaring your implied RSU number (I get about 457: 284 outstanding plus the 173 vested but shares not yet issued). Small difference but curious to why our numbers differ.

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  7. Any news here? Wondering the driver of the weakness here.

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    1. I would just say normal stock market volatility, no news that I'm aware of.

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  8. Transaction Bonus in the event of a Change of Control has been amended from 0.75% of Transaction Value, to 1% of Transaction Value "in excess of $50m". $2 strike on the options package.

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    1. Thanks - I was just looking at this too, the $2 strike stood out to me.

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    2. Any opinion on timing? Average price of 1.36 so wondering if I buy more haha

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    3. On the margin, couldn't you argue that this could disincentivize a sale in the near-term? One could interpret this as the Board not being willing to sell the business under $2/share; not having done a ton of work on the name, I'm not sure what potential buyers would be willing to pay here, but if potential buyers are at $1.8-1.9/share (arbitrary #s), the comp package would suggest that the Board may not take that deal.

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