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CryoLife Prepares to Board Medafor
The hostile takeover attempt by CryoLife Inc. has reached the “board the ship” stage. To recap, CryoLife, the Atlanta-based supplier of allograft and surgical glue products, has launched a hostile takeover attempt of Minnesota-based Medafor, Inc., the supplier of a hemostatic technology to CryoLife.
When we last checked in, CryoLife had sent a letter and package of material to Medafor’s shareholders offering $2 per share in cash and stock, which if continued to its logical conclusion would represent a $25 million purchase of Medafor.
According to published documents from Medafor, the future revenue potential from the current CryoLife supply contract is $40 million. So, in effect, CryoLife is attempting to obtain Medafor’s entire product line at a 37% discount to the existing supply contract.
Enough Medafor shareholders have accepted CryoLife’s purchase offer that last week CryoLife announced that it added 740,000 Medafor shares to the couple million it had already bought bringing the total to approximately 11% of Medafor. Apparently the remaining 89% are waiting for a better offer or are not interested in swapping managements.
CryoLife CEO Steven Anderson is now saying that he can call a special shareholders meeting and try to replace the Medafor board.
Back at CryoLife’s home front, things aren’t too rosy. In its most recently reported quarter, CryoLife missed Wall Street’s estimates by 12.5% (source: Yahoo Finance and Zacks). Net income for the nine months ended September 30, 2009, fell 38% from $10.2 million in 2008 to $6.3 million in 2009.
Wall Street’s consensus estimate for this quarter is that CryoLife will be down again due to continued profit margin erosion. Last quarter (again the September report), CryoLife’s profit had fallen 400 basis points to 11% of sales (operating profit margin) from 15% of sales in the same period a year earlier.
The good news for CryoLife is that it was able to generate cash by reducing the amount of money it sets aside to pay for allograft preservation and inventory (allograft services are about 50% of CryoLife’s sales). Frankly, the decline in this very important category was dramatic. In 2008, the amount set aside was $8.988 million. In 2009 it was $1.6 million. That single event was the vast majority of CryoLife’s cash flow for the first nine months of 2009.
No wonder CEO Steve Anderson wants a 37% discount to his current supply agreement and to pay for it with stock. Can’t blame a guy for trying.