Enzo Biochem (ENZ) – Activism and Potential Sale – 84% Upside (Uncertain)

Current Price: $2.99

Target Price: $5.51 (uncertain)

Upside: 84%

Expiration Date: TBD

Shareholder vote results

This idea was hinted by one of our members. It is a fairly interesting situation with two credible activists trying to oust the chairman of Enzo Biochem and move towards the sale of the company at a materially higher price. However, there is a substantial risk that activists will be unsuccessful in their fight.

Enzo Biochem (pharma lab products and services) is a very poorly run company, which over the years has significantly underperformed its peers and destroyed shareholder’s value. However, it seems all of that can change with the recent involvement of two activist funds – Harbert Discovery Fund and Roumell Asset Management. Respectively, their stakes in ENZ constitute 16% and 11% of the portfolio, and the combined ownership amounts to 18%. So far the campaign has been successful and in the recent meeting shareholders voted against the re-election of ENZ founder/chair/CEO Dr. Rabanni, who runs the show at the company. Dr. Rabanni has already submitted his resignation from the board, however, the resignation is conditional and according to by-laws, the board has 90 days to decide on whether to approve, disapprove of his resignation or take other actions. Therefore, so far it’s not clear if the resignation is real thing or just a show put out for the benefit of shareholders. The activist also seems to have doubts about the sincerity of the resignation and notes the uncertainty of the situation:

Will the Board accept Dr. Rabbani’s resignation, or will it act undemocratically and not accept the clear desire of the Company’s shareholders to remove Dr. Rabbani from the Board?

If Dr. Rabanni is forced to leave, this would create a major catalyst towards the transformation of the company and would leave the doors open for the activist to take the wheel and proceed with the sale of the company. HDF states that the potential value here could be around 2x sales (indicating around 92% upside):

We believe at a minimum the Company could realize 2x revenues in a sale. Based on recently announced run-rate Q1 fiscal 2021 revenue, that would result in $5.51 per share.

This price makes sense given a considerably higher valuation of peers (3-7x LTM revenues, while recent quarter run-rate multiple would be even higher). The only similar acquisitions in the industry date back to 2007 (Quest Diagnostics/Ameripath) and 2014 (Labcorp/Covance) and were also done at similar prices: 2.5x for Ameripath – 2x EV/sales for Covance. Since then, as noted by HDF, the recent catalyst from the pandemic and increased demand for lab equipment/reagents should’ve raised the multiples across the industry.

However, there’s a substantial risk that the board could in some way refuse to approve Dr. Rabanni’s resignation and shareholder’s value destruction will continue. Aside from the founder, there are 8 other directors (4 of which are supposedly independent):

• Barry W. Weiner – president/co-founder and Dr. Rabanni’s brother-in-law. Has been with the company for over 40 years.
• David Bench – CFO. Employed since the end of 2019.
• Kara Cannon – CCO. Has been with ENZ since 2011.
• Dieter Schapfel – CMO. Employed since 2012.

Independent directors:

• Rebecca Fischer – employed since Dec’19.
• Dov Perlysky – director since 2012.
• Mary Tagliaferri – employed since Nov’20.
• Ian Walters – employed since Nov’20.

It’s fair to assume that at least 3 directors and long-time comrades (Weiner, Cannon, and Schapfel) will want Dr. Rabanni to stay. Given long years of serving and behavior noted in RAM’s description of the communication with the company, Dov Perlysky also seems to be strongly sided with Dr. Rabanni. The remaining ones are either independent or became directors fairly recently and their intentions regarding the future of the company are not clear (worth noting that even the independent directors were placed on the board by Dr. Rabanni). Overall, without much further speculation, it seems that the odds of removing the chair/CEO are quite slim.

RAM also seems to be highly suspicious about the board’s decision given Dr. Rabanni’s influence, yet states that if the board doesn’t follow the will of shareholders, it could face legal repercussions:

Roumell hopes that Dr. Rabbani will have the common decency to not force the Company’s non-executive, independent directors into a situation that jeopardizes their reputations and careers for the sole purpose of protecting his own self-interest. Roumell reminds the non-executive, independent directors that they have a duty to all shareholders of the Company, and if they do not abide by the will of the Company’s shareholders, they potentially face serious professional and legal repercussions.

Quick background

Detailed history and activist thesis can be found in the filings (here, here, here). A short summary is provided below.

Harbert Discovery Fund (owns 11.7%) started its activist campaign back in 2019 noting significant underperformance of the company. The fund pushed for the board change and in Feb’20, with the support of proxy firms (ISS and Glass Lewis), managed to put two of its nominees on the board. However, this brought zero results, and eventually, in November’20 both nominees resigned stating:

Chairman and CEO Rabbani has created such an extremely hostile environment that Pete and Fabian found their position untenable as minority members in opposition to Mr. Rabbani’s continued mismanagement.

Both members were quickly replaced by two new directors (Tragliaferri and Walters). After that, HDF issued several more letters aimed at the independent directors pushing for the immediate resignation of Dr. Rabanni and the sale of the company.

Roumell Asset Management has been a shareholder of ENZ since 2018. During 2019 the activist tried to offer two of their nominees to the board, however,  got rebuffed and subsequently sold-off the stake in July’19. After HDF successfully placed their members on the board and ENZ received approval for COVID-19 tests, RAM re-initiated the investment and eventually accumulated a 5.7% stake. After getting ignored by the board several times, RAM tried again to recommend its own 2 nominees to the board, however, the board has retroactively set the nomination deadline for the 6th of October, but only announced it by the end of November, this way eliminating the nomination option for the activist.

Arguments for the Change

– Significant underperformance compared to peers and indices:

Current LTM revenue multiple comparisons with peers:

– Operating losses since 2004, weak overall performance:

– Growing a patent portfolio with questionable returns. ENZ does have a history of successful litigation settlements ($125m in total so far), however in Mar’20 Supreme Court has denied new petition claims from Enzo, so according to RAM, the company can no longer use litigation awards to fund its operational losses.

– Outsized compensation compared to significantly better-performing peers – chairman and president received $35m combined since 2004.

– 44-year tenure for Dr. Rabanni.

– Enzo leasing a facility in Farmingdale from the company owned by Dr. Rabanni and his affiliates ($1.8m annually).

– History of broken promises (value creation of therapeutics business).

– Wasting a significant amount of shareholder money to fight activists. ENZ has spent $4m (7% of its cash balance) on the campaign against HDF. Glass Lewis (proxy firm) has summed it up as:

We are inclined to argue the current enzo directors have manipulated Enzo’s corporate machinery in the extreme.

Enzo Biochem

Enzo runs clinical labs in the Northeast region, develops platforms and reagents for use in its own labs and other companies, and operates a therapeutics division:

• Clinical labs – full-service clinical laboratory in Farmingdale, NY. Over 30 patient service centers in NY and NJ and a stand-alone rapid response lab in NYC.
• Life sciences – diagnostic products and lab tools development. For its own and other labs.
• Therapeutics – treatment for bone-related, immune-related, and gastrointestinal diseases.