Activist Politan Capital engages with Azenta. Here’s how the firm may boost shareholder value

Business: Azenta is a life sciences firm that operates by means of two segments. First, there’s the life sciences merchandise division, which provides automated chilly pattern administration techniques for compound and organic pattern storage, tools for pattern preparation and dealing with, consumables and devices that assist prospects in managing samples all through their analysis discovery and growth workflows. Then, there may be the life sciences companies phase, which supplies complete pattern administration packages, built-in chilly chain options, informatics and sample-based laboratory companies to advance scientific analysis and assist drug growth. The companies embody pattern storage, genomic sequencing, gene synthesis, laboratory processing, laboratory evaluation, biospecimen procurement and different assist companies.

Stock Market Value: $3.02B ($50.19 per share)

Politan has engaged in discussions with the Azenta board and administration group relating to the firm’s enterprise, operations, monetary situation, strategic plans, governance and different issues.

Azenta (previously often known as Brooks Automation) just isn’t a brand new firm. It has been round for practically half a century. For many years it operated as a number one automation supplier and companion to the international semiconductor manufacturing trade. On Feb. 1, 2022, Azenta offered its semiconductor automation business to Thomas H. Lee Partners, L.P. for about $3 billion. Today, it focuses completely on the life sciences companies. Now, the firm produces and companies chilly storage options and is the largest supplier in its markets. 

Following the sale of the semiconductor enterprise, the firm had $2.7 billion of internet money on its steadiness sheet. Azenta used roughly $1 billion of that for inventory buybacks and roughly $500 million to acquire B Medical, a temperature-controlled storage and transportation options enterprise. That leaves them right now with $1.1 billion in internet money and a $3.0 billion market cap. One-third of the firm is money, and buyers wish to know how it plans to deploy that capital. And they do have some trigger to be involved. While the share buyback was properly suggested, the acquisition of B Medical – which was completed on Oct. 3, 2022 – was not properly acquired by the market. When the transaction was first introduced on Aug. 8, 2022, the inventory dropped over 10% by means of the following two days. Additionally, Azenta has missed steerage repeatedly, estimating double-digit margins and powerful income development, and falling woefully brief on each metrics. This has put extra stress on the inventory, which has dropped from $69.01 per share previous to the B Medical acquisition announcement to $50.77 previous to Politan’s 13D submitting, a complete of 26.4%. Over the similar time, the S&P 500 has returned 8.1%.

Azenta has a really robust core enterprise. The issues it’s experiencing all revolve round the extra money on the steadiness sheet. First, with one-third of the market cap of the firm sitting in money, it’s not possible to precisely value Azenta when there is no such thing as a clear path for how that capital will likely be put to work. This is exacerbated by utilizing $500 million on an acquisition that the market didn’t seem to agree with. This makes the firm un-investable for a lot of buyers, not as a result of they don’t imagine in administration or suppose administration is doing a nasty job, however due to the uncertainty over such an enormous a part of its asset base. However, this similar dynamic creates a chance for activist buyers. By getting a shareholder consultant on the board who has a historical past of not solely safeguarding, however rising shareholder value, it would give the market confidence that the capital will likely be put to an accretive use. This alone can change an organization from buying and selling at a reduction to buying and selling at a premium.

The second situation with the firm is income development and working margins. The development hurdles aren’t as a lot of an absolute situation as a relative one. Azenta’s high line has been rising, simply not as quick as the firm’s steerage. This additionally may be alleviated by including board members with expertise in speaking to the investor world. Further, working margins have been considerably compressed, notably versus steerage, however that is typically an issue with corporations which have an extra amount of money. Companies that get a sudden inflow of money typically lose the self-discipline to rein in prices as there is no such thing as a urgency to function on a good funds. Putting a superb portion of the money to make use of correctly wouldn’t solely create shareholder value, however it will drive administration to be extra disciplined of their spending. This would result in higher working margins which are extra in line with administration steerage.

If Politan is investing $200 million into an organization that has one-third of its market cap in internet money, we anticipate the firm will need a seat at the desk to advise on how that money ought to be spent. We additionally imagine that different shareholders would need the similar. This is one thing administration ought to need, too. Let’s make one factor clear that’s typically misunderstood in activist conditions: Just as a result of Politan filed a 13D and simply because the firm is assembly with administration, doesn’t imply that it’s vital of administration. It additionally doesn’t essentially imply that the firm just isn’t on the similar web page as administration. It could be very doable that each Politan and administration wish to do what’s greatest for the share worth and each value the different’s opinion, and we see a fast appointment to the Azenta board. However, if that’s not the course taken, Politan has proven that it has conviction in its investments and won’t shrink back from a proxy battle. Given the firm’s current efficiency and the information of this example, we don’t suppose it would come to that. Azenta’s director nomination deadline is Nov. 2, so we is not going to have to attend that lengthy for a solution.  

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Azenta is owned in the fund.