Starboard Value spots fresh opportunities for diversified tech company Colfax
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Colfax Corp.
Businesses ColfaxGlobal technology company. There are two main segments to the company: (i), Fabrication Technology, which includes consumables and equipment. These include joining, cutting and welding, as well gas control equipment. (ii), Medical Technology: these products treat patients with musculoskeletal conditions due to degenerative disease, injury, trauma, sports injuries and other deformities. You can find a variety of products for reconstructive joints, including orthopedic bracings and hot-cold therapy products.
Stock Market ValuePrice: $7.3B (51.62/share)
Starboard Value Activist
Percentage of Ownership Other than that,
Average Cost: Other than that,
Commentary by an Activist:Starboard, a highly successful activist investor, has vast operational activism experience that assists boards and management teams to run businesses more efficiently and improve margins. The company has filed 103 13D returns. In those 103 filings, they have averaged a return of 33.4% versus 14.1% for the S&P 500. The average hold time for 13D is 18.2 month.
What’s the Deal?
Starboard accepted a role in the company. He supports management’s plans to seperate into two businesses, but sees value addition by increasing margins.
Behind the scenes:
Colfax is made up of two distinct businesses. (i) A fabrication technology segment (“FabTech”) makes 2/3 of Company’s revenues and produces filler metals, welding machines, and other tools. (ii) A medical technology segment (“MedTech”) makes 1/3 of revenue and creates medical devices such as joint replacements or braces. FabTech, the industry leader in many areas worldwide is growing its North American market share. MedTech is the market leader in rehabilitation and prevention. It also holds the top market share in reconstructive medicine.
Both of these businesses are fantastic, but they don’t naturally belong together. The company also announced that the companies would be seperating the businesses in March and that this will happen during the first quarter 2022. The separation of the businesses will create shareholder value as both management teams are able to focus on core competencies. Lincoln Electric is FabTech’s primary peer. While it can be argued that FabTech alone should trade at a greater multiple than Lincoln Electric it should still trade at at least the same multiple. This would allow it to have a valuation of $5.4 billion. MedTech would have a valuation of $3.7 billion. That’s a double revenue multiple, and a triple EBITDA multiplier, as opposed to 4x and 9x for their peers.
This is the second opportunity to create value by closing the valuation gap and focusing on growth and margins. As the business has a median revenue growth rate of 30 and an EBITDA margin of 30, it should be able to grow its revenues at least as high or higher than its peers. MedTech ranks at the bottom with 23.5%. MedTech’s gross margin is similar to that of its peers. selling, general and administrative expenseproblem
Starboard’s track record in helping businesses improve their operating margins is extensive. The firm recently did just that at a similar company, Merit Medical, generating a 113% return in under two years versus 36% for the S&P 500. The company could also reduce excess costs to improve its margins, and invest more in growth. The company supports this view and announced that it will target a 25 percent EBITDA for MedTech. Starboard thinks this plan for improving margins could be made more efficient by focusing on it, as Merit Medical did. A standalone MedTech, adjusted for margin improvement would trade at 10x EBITDA instead of its peers’ 19x. This would mean that the stock price for MedTech standalone in 2023 will be $76 and $94 respectively.
Ken Squire, the president and founder of 13D Monitor is an institution research service that focuses on shareholder activism. He also founded and managed the portfolio for the 13D Activist Fund which invests in a range of activist 13D investments.
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