Osteotech: Hostile to Shareholders?
BY JOHN MCCORMICK, AUGUST 30, 2005
As many of you now know, the venerable (and world's largest) non-profit tissue bank Musculoskeletal Transplant Foundation (MTF) announced on Monday that is had proposed to acquire all of the outstanding common stock of Osteotech, Inc. (Nasdaq: OSTE) for $6.25 per share in cold hard cash. In fact, this offer was sent to the Osteotech board of directors on July 12, 2005 - nearly two months ago. By the standards of the financial world, the $6.25 per share was a substantial gesture by MTF. $6.25 a share for Osteotech (i) represents a premium of 40% over the closing sale price at the end of last week, (ii) a premium of 66% over the average price since January 1, 2005 and (iii) exceeds Osteotech's 52-week high stock price.
Osteotech's Response to the MTF Offer
After taking over a month to deliberate, Osteotech flatly rejected MTF's offer the day after an August 18 board meeting. Ostetech released this information yesterday in response to MTF's Monday announcement by saying the MTF offer "severely shortchanges shareholders". This was stated in a carefully worded press release replete with key phrases like "financial advisor" (in this case Bear Stearns), "unanimous vote" and "independent directors".
MTF's Counter-Response?
MTF has taken the tack that if Osteotech's Board won't listen: appeal to the shareholders directly. Hence yesterday's announcement by MTF detailing the otherwise non-public offer and rejection. Coupled with the cryptic statement by MTF that "any further delay in the negotiation and consummation of a transaction likely would result in a reduction in the per share amount that MTF would be able to offer to Osteotech's shareholders", we peg yesterday's announcement as a hostile takeover offer on MTF's part. Pretty savvy for a charitable institution!
Our Reactions
We called the former President and Chief Operating Officer of Osteotech, Arthur A. Alfaro, for his perspective on the situation and he views the MTF offer as "in the best interest for Osteotech, MTF and for the industry as a whole. Osteotech should accept the offer."
Neither HealthpointCapital nor Mr. Alfaro are in the business of offering investment advice. We certainly leave it up to the Osteotech shareholders to decide for themselves. We do note, however, that a number of industry sources have indicated to us that Osteotech has received offers before and has continually spurned them. Based on anecdotal discussions we have had, we have been tempted to conjecture that Osteotech is more interested in perpetuating the status quo than seriously considering offers from third parties. Certainly anyone who has been ever been on an Osteotech quarterly earnings call is familiar with the Company's management not being exactly shareholder-centric.
We also think that there aren't too many logical acquirors for Osteotech, particularly ones such as MTF, who could get a significantly higher yield on donor tissue than Osteotech is currently getting- ergo, make $6.25 pay for itself. MTF has the tissue processing, clinical expertise and industry relationships to effectively acquire and integrate Osteotech. Plus they have the cash - MTF has been clear: their offer has no financing contingency. In merger and acquisition parlance that says we've got the cash. Not too many other acquirors are around. Regeneration Technologies doesn't have the cash - they are out raising money and IsoTis doesn't have the size. Finally, let's not forget how Regeneration Technologies went out to the industry seeking "strategic alternatives" last spring and no one stepped up to the plate. That eliminates just about everyone else.
It Gets Interesting
There is certainly some baggage here. Osteotech and MTF have long had numerous business relationships in some cases as vendor/customer, in some cases as arch enemies. Right now MTF is Osteotech's largest processing client, but Osteotech is trying to diversify away from MTF for tissue supply and is seeking to wind down its contracts with MTF. Meanwhile MTF acquired the allograft tissue banking operations of the American Red Cross earlier this year which means MTF was providing Osteotech with even more donors. We are led to believe this had more to do with Osteotech's revenue increase this year than operational successes in the course of ordinary business. It goes on and on, but as we drill into it: the operational synergies make sense and - again - we doubt that many other suitors will appear.
We also question the independence of Osteotech's Board of Directors. Although six out of nine of the Directors are labeled "independent", questions we have brought to knowledgeable industry sources suggest otherwise. This is a close knit group where, we are led to believe, dissenters have been asked to leave. Certainly it looks like no one on the Board is piping up in favor of this one and only offer for what looks like an unprofitable company whose value has been impaired over the last several years.
Now it looks like burden of making a real decision is shifting toward the Osteotech shareholders.
