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Company: Azenta (AZTA)
Business: Azenta is a life sciences company that operates through two segments. First, there’s the life sciences products division, which offers automated cold sample management systems for compound and biological sample storage, equipment for sample preparation and handling, consumables and instruments that help customers in managing samples throughout their research discovery and development workflows. Then, there is the life sciences 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. The services include sample storage, genomic sequencing, gene synthesis, laboratory processing, laboratory analysis, biospecimen procurement and other support services.
Stock Market Value: $3.02B ($50.19 per share)
Activist: Politan Capital Management
Percentage Ownership: 6.87%
Average Cost: $44.83
Activist Commentary: Politan Capital Management was founded by Quentin Koffey. Most recently, Koffey led the activism strategy at Senator Investment Group. Prior to that, he led the activist practice at D.E. Shaw, and before that he was at Elliott Associates. Koffey is operating Politan more like a private equity fund than a traditional long-short equity hedge fund, as it can draw down locked-up capital to give it enough time to accomplish its goals through active engagement with boards and management teams to improve governance, operations or strategic direction. Politan looks for high quality businesses that underperform their peers or potential. These businesses also have a clear fix and a defined pathway to implement that solution. This is Politan’s second 13D filing and third activist campaign, all of which have been in the health-care sector.
What’s happening?
Politan has engaged in discussions with the Azenta board 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 has been around for nearly half a century. For decades it operated as a leading automation provider and partner to the global semiconductor manufacturing industry. On Feb. 1, 2022, Azenta sold its semiconductor automation business to Thomas H. Lee Partners, L.P. for about $3 billion. Today, it focuses exclusively on the life sciences businesses. Now, the company produces and services cold storage solutions and is the largest provider in its markets.
Following the sale of the semiconductor business, the company had $2.7 billion of net cash on its balance sheet. Azenta used approximately $1 billion of that for stock buybacks and roughly $500 million to acquire B Medical, a temperature-controlled storage and transportation solutions business. That leaves them today with $1.1 billion in net cash and a $3.0 billion market cap. One-third of the company is cash, and investors want to know how it plans to deploy that capital. And they do have some cause to be concerned. While the share buyback was well advised, the acquisition of B Medical – which was completed on Oct. 3, 2022 – was not well received by the market. When the transaction was first announced on Aug. 8, 2022, the stock dropped over 10% through the following two days. Additionally, Azenta has missed guidance repeatedly, estimating double-digit margins and strong revenue growth, and falling woefully short on both metrics. This has put more pressure on the stock, which has dropped from $69.01 per share prior to the B Medical acquisition announcement to $50.77 prior to Politan’s 13D filing, a total of 26.4%. Over the same time, the S&P 500 has returned 8.1%.
Azenta has a very strong core business. The problems it is experiencing all revolve around the excess cash on the balance sheet. First, with one-third of the market cap of the company sitting in cash, it is impossible to accurately value Azenta when there is no clear direction for how that capital will be put to work. This is exacerbated by using $500 million on an acquisition that the market did not appear to agree with. This makes the company un-investable for many investors, not because they do not believe in management or think management is doing a bad job, but because of the uncertainty over such a big part of its asset base. However, this same dynamic creates an opportunity for activist investors. By getting a shareholder representative on the board who has a history of not only safeguarding, but growing shareholder value, it will give the market confidence that the capital will be put to an accretive use. This alone can change a company from trading at a discount to trading at a premium.
The second issue with the company is revenue growth and operating margins. The growth hurdles are not as much of an absolute issue as a relative one. Azenta’s top line has been growing, just not as fast as the company’s guidance. This also can be alleviated by adding board members with experience in communicating to the investor world. Further, operating margins have been significantly compressed, particularly versus guidance, but this is often a problem with companies that have an excess amount of cash. Companies that get a sudden influx of cash often lose the discipline to rein in costs as there is no urgency to operate on a tight budget. Putting a good portion of the cash to use wisely would not only create shareholder value, but it would force management to be more disciplined in their spending. This would lead to better operating margins that are more in line with management guidance.
If Politan is investing $200 million into a company that has one-third of its market cap in net cash, we expect the firm will want a seat at the table to advise on how that cash should be spent. We also believe that other shareholders would want the same. This is something management should want, too. Let’s make one thing clear that is often misunderstood in activist situations: Just because Politan filed a 13D and just because the firm is meeting with management, does not mean that it is critical of management. It also does not necessarily mean that the firm is not on the same page as management. It is very possible that both Politan and management want to do what is best for the share price and both value the other’s opinion, and we see a quick appointment to the Azenta board. However, if that is not the course taken, Politan has shown that it has conviction 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 think it will come to that. Azenta’s director nomination deadline is Nov. 2, so we will not 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, a mutual fund that invests in a portfolio of activist 13D investments. Azenta is owned in the fund.