Voce Capital Pushes For Acquisition Of Solta Medical, Activist Investor David Callan Joins In

by Scott Matusow
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Submitted by Scott Matusow as part of our contributors program.

Merger and acquisition speculation is one of the most interesting and exciting elements of the stock market. Sometimes both activist institutions and private investors can leverage deals or stop deals from happening depending on how many shares they control in the company. Recently, there have been several examples of activist investors and companies getting involved in buyout activity.

One of the most interesting buyout battles recently was started between an activist investor and Dell Incorporated (DELL). Dell founder Michael Dell, along with Silver Lake Management, offered $13.65 a share to make Dell a private company. Billionaire activist investor Carl Ichan owns an 8.7% stake in the company and was opposed to this offer. Ichan thinks that Michael Dell’s offer is not enough and entered his own bid. He proposed $14 a share for a portion of the company, plus warrants should the stock climb above $20. Recently, Michael Dell increased his bid by 10 cents to $13.75, but the disagreement between Dell, Ichan, and the shareholders continues.

Late last year, there were talks that Sprint (S) would make a bid for Clearwire Corporation. Sprint already owned 51% of the shares, but they wanted to offer $2.90 per share for the rest of the stake in Clearwire. The next day the stock rallied over the offering price in belief that the offer was too low and would be raised after a rejection by the board. The Speculation was correct, as the CEO of DISH Network (DISH) Charlie Ergen stepped in to offer $3.30 a share. This sparked a bidding war, as both companies believed the Clearwire acquisition was integral to their industries. Eventually, DISH upped their offer to $4.40 per share and Sprint topped it by offering $5 per share.

Last year, I wrote several articles on an interesting acquisition struggle concerning Obagi Medical Products, predicting the company would be acquired for at least $22. In April of this year, Valeant Pharmaceuticals (VRX) acquired Obagi for $24 in cash. During my due diligence into the potential sale of Obagi, I acquired the information that activist investor David Callan owned a large block of Obagi shares. I was introduced to David via a mutual friend, and we spoke at length about his desire to see Obagi acquired. While David is not the huge player that Carl Ichan is, or Obagi a giant company like Dell, there are certain similarities that made its story as interesting, if not more so.

Now, it turns out that David has been buying shares of Solta Medical (SLTM) since the company announced less than stellar earnings on August 7th.

This is very significant for several reasons – for one, David makes his money buying companies he feels are ripe for acquisitions. Also, he has yet to see one of his investments in these situations fail. Secondly, the active involvement of Voce Capital management who was also involved in getting Obagi sold, is now putting similar pressure on Solta as they did with Obagi.

I find it interesting that we are seeing the same “players” pushing hard for a buy-out with Solta, who also succeeded in seeing a buy-out realized for Obagi.

Let’s take a closer look at Voce’s involvement with both Obagi and now Solta:

Beginning on February 10, 2012, Voce Capital sent a letter to the Obagi Board of Directors criticizing the Board’s adoption of a poison pill and demanding immediate action to address the company’s corporate governance failures. Voce’s letter in part stated that it believed Obagi had spurned recent overtures to acquire the company, and further cited pervasive corporate governance deficiencies that explain the Board’s unwillingness to consider those proposals. Voce also expressed concern over the Board’s recent decision to adopt a poison pill, citing it as further evidence of the Board’s entrenchment.

Afterwards, Obagi’s poison pill was officially voted out by the shareholders on June 6th, clearing the way for a hostile bid for the company. On July 10, the company officially removed the expired pill from its corporate governance.

In one last letter made public in December of last year and sent to the Obagi Board of Directors (BOD), Voce criticized the BOD for continued mismanagement of the company, its refusal to address Voce’s demands for corporate governance reform, and its unbending hostility toward all acquisition interest.

Voce never relented, and with David Callan joining in the fight, Obagi gave in and was acquired by Valeant for $24 a share in an all cash deal in April of this year.

The situation is different with Solta, as it appears the BOD and new interim CEO are not entrenched like Obagi’s was. The company appears willing to explore “strategic alternatives.”

From Solta’s press release, interim CEO Mark Sieczkarek states:

“We believe the best and fastest way to build returns for our shareholders is by increasing the strategic value of our assets. At the same time, the Board of Directors has the mechanisms in place to evaluate credible strategic alternatives,” continued Mr. Sieczkarek.”

The above is very important, as Sieczkarek seems to be suggesting that the company has hired an investment banker to explore acquisition interest. We know there is serious interest and suitors according to a recent letter made public by Voce. In an excerpt from this letter, we read:

“Following the annual meeting, we “renew[ed] our call for the independent members of the Solta Board to review the full range of options available to increase shareholder value, including a strategic sale or merger of the Company.” Inexplicably Solta has ignored these demands. We can’t understand the Company’s failure to retain advisors to conduct such a review nor comprehend the Company’s refusal to consider the inbound acquisition interest it has recently received.

It bears repeating that there’s real and substantial acquisition interest in Solta. The aesthetic device space is rapidly coalescing around a limited number of platforms with both scale and scope. Solta has an attractive mix of assets other industry players covet and, as the largest remaining independent property, it’s already being sought by the industry consolidators. At the same time, Solta’s flabby operations provide juicy synergy opportunities for any horizontal consolidation play.”

For these reasons, we are aware of at least three industry participants who are keenly interested in acquiring Solta. They’ve had previous conversations with Solta about combining, and have advisors at their disposal to assist them in pursuing a transaction. Recently (including after the annual meeting) interested parties approached management and were told that Solta was unwilling to entertain merger discussions or to even meet.

Immediately before the recent earnings report, CEO Stephen J. Fanning not only stepped down as Solta CEO, but also relinquished his seat on the Solta BOD. This factor, coupled with the interim CEO Sieczkarek openly pursuing strategic alternatives make it clear to us that Fanning was thwarting potential suitors, resulting in him being forced out in order to clear the way for the company to be acquired.

Enter in David Callan – again.

I spoke with Callan and here were his thoughts on the company:

“I was pleased to learn that the CEO has stepped down and the board of directors have announced they are open to strategic alternatives. I think the sale of the company is the best possible option for shareholders who have patiently let this management team take the company as far as they can as a standalone. Like other companies I have been active in, I feel a competitor can highly leverage scale with the purchase of Solta Medical and their wonderful bundle of products. This is just another case where shareholders will be rewarded with the right decision making going forward.

As this is a global business, a distinct press release with clarity that they will formerly explore alternatives by hiring an investment bank with experience in the space, will allow companies and private equity groups around the World to set their eyes on this wonderful opportunity to own an undervalued company with a growing platform, in a high demand space. I know from personal past experience, the most obvious buyers are not always the ones that ultimately become the acquirer. Shareholders like myself demand the attention this company deserves.

Based on the conference call, I personally do think they now understand that a company sale would be in the best interest of their shareholders; I think they understand their fiduciary responsibilities to us; and I sincerely hope they act in timely fashion and with the required tenacity to get shareholders the best possible price.”

As mentioned prior, David has been successful every time he has invested in a company as a buy-out play. I don’t think this will be any different. Putting together the players involved and their history along with management being open to the idea of strategic alternatives make this a buyout play worth watching. With the combination of these factors, I feel this has the potential to take much less time to play out than the Obagi scenario where management showed much more hostility toward any potential suitors.

The name that comes up the most in the rumor mill to acquire Solta is Valeant Pharmaceuticals. The main reason I believe this is Valeant’s strong international presence. In Valeant’s recent earnings, sales from emerging markets grew 26% year over year driven by continued strong growth in Poland, Russia, Brazil, Mexico, South East Asia and South Africa.

The above is important as Solta recently received regulatory approval in several foreign markets where Valeant has a strong presence in. From Solta’s earning’s call transcript we read:

The Liposonix tip production issue that affected the first quarter have been fully resolved and we did see the growth internationally in the second quarter and benefited from regulatory clearances in Singapore, Brazil and Taiwan. The pricing pressure did not affect international markets for Liposonix because sales there are primarily through distributors and we have not seen the same level of competitive presence outside of North America. Total revenue from Liposonix treatment kit in the quarter rose by 10% from the same period last year.

Conclusion

While Solta is certainly not a monster sized company like Dell, and David Callan is not the player Carl Ichan is, it does appear Solta is up for sale, and as Voce has mentioned publicly in its letter, at least 3 different companies seemed prepared to bid for the company. I feel additional companies might be interested and benefit from adding Solta’s assets to their product portfolios.

Voce, along with David Callan were successful in getting Obagi acquired in the face of an obviously entrenched Obagi BOD. Solta now appears to be far more receptive to bids in lieu of the removal of its former CEO who Voce seemed to target in its letters.

The minimum fair value price for Solta would be based on a 1.75 ratio price-to-sales, or a little over $3.75 a share. Considering Solta’s former management’s failures to properly lever its assets, in the hands of a well-equipped and capable operator, Solta’s Assets could generate revenues well north of $500M, if not $1B, especially if a company like Valeant acquired them.

I predict Solta will be acquired sooner than later, and for a price around $350M, or roughly $4.25 a share.

Disclosure: I am long SLTM.

Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky – always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.

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