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Company: Azenta (AZTA)
Business: Azenta is a life science company that operates in two segments. First, there is the Life Science Products division, which offers automated cold sample management systems for compound and biological sample storage, sample preparation and handling equipment, and consumables and instruments to assist customers in sample management during their research, discovery and development workflows support. Then there is the Life Science Services segment, which provides comprehensive sample management programs, integrated cold chain solutions, informatics and sample-based laboratory services to advance scientific research and support drug development. Services include sample storage, genome sequencing, gene synthesis, laboratory processing, laboratory analysis, biospecimen procurement and other support services.
Market value: $3.02 billion ($50.19 per share)
Activist: Politan Capital Management
Percentage ownership: 6.87%
Average cost: $44.83
Comment from activists: Politan Capital Management was founded by Quentin Koffey. Most recently, Koffey led activism strategy at Senator Investment Group. Previously, he led the activist practice at DE Shaw and before that he was at Elliott Associates. Koffey runs Politan more like a private equity fund than a traditional long-short equity hedge fund, in that it can withdraw locked capital through active engagement with boards and management teams to improve governance, giving it enough time to achieve its goals to reach. Operations or strategic direction. Politan looks for high-quality companies that are underperforming their competitors or are living up to their potential. These companies also have a clear solution and a defined path to implement that solution. This is Politan’s second 13D filing and third activist campaign, all based in the healthcare sector.
What happens?
Politan has held discussions with Azenta’s Board of Directors and management team regarding the Company’s business, operations, financial condition, strategic plans, governance and other matters.
Behind the scenes
Azenta (formerly known as Brooks Automation) is not a new company. It’s been around for almost half a century. For decades, the company served as a leading automation provider and partner to the global semiconductor manufacturing industry. On February 1, 2022, Azenta sold its semiconductor automation business to Thomas H. Lee Partners, LP for approximately $3 billion. Today it focuses exclusively on life science companies. The company now produces and maintains cold storage solutions and is the largest provider in its markets.
After selling the semiconductor business, the company had $2.7 billion in net cash on its balance sheet. Azenta used about $1 billion of that for stock buybacks and about $500 million to acquire B Medical, a temperature-controlled storage and transportation solutions company. This means they now have net cash assets of $1.1 billion and a market cap of $3.0 billion. A third of the company is cash, and investors want to know how the company plans to use that capital. And they have reason to worry. While the share buyback was well-advised, the acquisition of B Medical – which closed on October 3, 2022 – was not well received by the market. When the deal was first announced on August 8, 2022, the stock fell over 10% in the following two days. Additionally, Azenta has repeatedly missed its forecasts, forecasting double-digit margins and strong revenue growth, while significantly underperforming on both metrics. This has added pressure to the stock, which has fallen from $69.01 per share before the B Medical acquisition announcement to $50.77 before Politan’s 13D filing, for a total of 26.4% corresponds. Over the same period, the S&P 500 returned 8.1%.
Azenta has a very strong core business. The problems it faces all revolve around the excess cash on the balance sheet. First, it is impossible to accurately value Azenta because a third of the company’s market capitalization is held in cash if there is no clear direction on how that capital is deployed. This is exacerbated by the fact that $500 million was used for an acquisition that the market apparently did not agree with. This makes the company uninvestable for many investors, not because they don’t believe in management or think management is doing a bad job, but because of the uncertainty surrounding so much of its asset base. However, the same dynamic also presents opportunities for activist investors. By including a shareholder representative on the board who has not only secured but also increased shareholder value in the past, the market will be convinced that the capital is being put to value-enhancing use. This alone can cause a company to switch from trading at a discount to trading at a premium.
The company’s second problem is revenue growth and operating margins. The obstacles to growth are less of an absolute problem and more of a relative problem. Azenta’s sales have been growing, but not as quickly as the company’s forecasts. This can also be mitigated by bringing in board members with experience in communicating with the investing community. Additionally, operating margins have fallen significantly, particularly compared to forecasts. However, this is often a problem for companies that have excess cash. Companies that experience a sudden influx of cash often lose the discipline to contain costs because there is no urgency to operate on a tight budget. Spending a lot of the money wisely would not only create value for shareholders, but also force management to be more disciplined in its spending. This would result in better operating margins that are more in line with management guidance.
If Politan invests $200 million in a company that has a third of its market cap in net cash, we assume the company will want a seat at the table to deliberate on how to spend that money. We also believe other shareholders would want the same. Management should want that too. Let’s be clear about something that’s often misunderstood in activist situations: Just because Politan filed a 13D and just because the company meets with management doesn’t mean it’s critical of management. It also doesn’t necessarily mean that the company isn’t on the same page as management. It’s entirely possible that both Politan and management want to do what’s best for the stock price and both value each other’s opinions, and we see a quick appointment to Azenta’s board. However, should this not be the case, Politan has shown that it is confident in its investments and will not shy away from a proxy fight. Given the Company’s recent performance and the facts of this situation, we do not believe that this will occur. The deadline for nominations for Azenta’s director is November 2nd, so we won’t have to wait that long for an answer.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments. Azenta is a shareholder in the fund.