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

5 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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  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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  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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    Replies
    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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