Strong Support from Other Shareholders for
Voce’s Views Highlights Need for Air Methods to Publicly Hire
Independent Financial Advisor and Evaluate Strategic
Alternatives
Multi-Month Delay by Board Unwarranted and
Unacceptable
Serious Corporate Governance Issues Call into
Question Board’s Alignment with Shareholder Interests, Including
Board Composition, Compensation, Entrenchment and Heavy Stock
Sales
Air Methods' Board Should Expect Shareholders
to Hold It Accountable at 2016 Annual Meeting if Board Stubbornly
Maintains Refusal to Act
Voce Capital Management LLC (“Voce”), the beneficial owner of
approximately 4.9% of Air Methods Corporation (“Air Methods” or the
“Company”) (Nasdaq:AIRM), today sent a letter to the Company’s
Board of Directors (the “Board”).
The full text of Voce’s letter follows:
October 20, 2015
Members of the Board of DirectorsAir Methods Corporation7211
South Peoria StreetEnglewood, Colorado 80112
Attention: Corporate Secretary
Lady and Gentlemen:
As you are well aware, for several months Voce Capital
Management LLC (“Voce”) has implored Air Methods to take action to
address the destruction of shareholder value wrought by the
Company’s increasingly untenable ownership structure. Out of
respect for the Board, and in an effort to allow it to reach on its
own what most rational observers believe is a fairly inescapable
conclusion, we’ve patiently employed a variety of channels to
communicate our views and gently attempt to prod the Board into
action. These have included a trip to Denver in June to meet with
management; a private letter to the Board, dated June 30, 2015 (the
“First Letter”); another visit to Denver on August 3 to meet with
the Board; a number of follow-up calls in August which confirmed
the Board did not intend to pursue our recommendations; another
detailed letter, this time public, dated September 16 (the “Second
Letter”); more fruitless conversations; and yet another private
letter to the Board, dated October 2, 2015 (the “Third
Letter”).
More than a month has passed since the Second Letter and we have
been engaged with the Board in this futile colloquy for the better
part of six months. While we have appreciated the open lines of
communication, we are disappointed by the Board’s inertia and
unwillingness to act in the best interests of shareholders. Here is
what we have learned:
Our views command substantial support. As a reminder,
Voce is the beneficial owner of approximately two million shares
(4.9%) of Air Methods, making us the Company’s sixth-largest
shareholder. Following the Second Letter, we have spoken with many
of the Company’s other top shareholders, most of whom (like us)
have been owners for multi-year periods. We haven’t met a single
shareholder that didn’t share our frustrations nor concur that an
evaluation of all options, including a sale of the Company,
represents a better path forward for shareholders than anything the
Board or management has articulated to date. We know that many of
our fellow shareholders have communicated these sentiments directly
to the Company as well but have encountered the same lethargy that
we’ve observed. In addition, most of the research analysts who
cover Air Methods (many of whom also have very long histories
following the Company) have published notes corroborating our
analysis.1
The Board’s lack of genuine response is insulting to
shareholders. After spending the entire summer trying to spur
the Board into action, we released the Second Letter publicly. Our
hope was that it would motivate the Board to act or, at a minimum,
invite it to specifically respond to our ideas and, to the extent
it had a superior plan to create shareholder value, reveal it. Yet
the Board has refused to even publicly acknowledge our dialogue.
Its only responses have been timorous, terse and trite. For
example, in response to our Second Letter, which ran nine
single-spaced pages (including seven footnotes), we received a
brief missive that would have fit on a postcard with room to spare:
“Thank you for your letter of September 16. We always appreciate
input from our shareholders and you can be sure that our Board of
Directors will consider the points you have raised.” Really?2
The Board fails to comprehend that urgent action is
required. The Board’s platitudinous assertions about its
devotion to shareholder interests are, without accompanying action,
meaningless. We have been mindful of allowing the Board the time
and space to engage the financial advisor(s) of its choice, but
more than ample opportunity for this has already passed. In the
meantime, the Company’s stock continues to underperform and it
remains one of the market’s most heavily shorted names.3 We move
closer each day to the demise of the current benevolent interest
rate regime which may significantly limit the attractiveness of, or
foreclose altogether, a potential sale of the Company.
The costs of delay can also be seen in the Board’s apparent
failure to capitalize on a significant opportunity to repurchase
shares at compelling valuations. Shortly after our meeting with the
Board, it announced a $200 million share repurchase plan on August
6, with the stock price at $39.57. Unless we’re mistaken, we
believe the Company has bought back few, if any, shares under this
plan, despite the fact that more than 17,000,000 shares
(approximately 49% of the float) have turned over since that time,
almost all of them at prices below the announcement date and in
many instances at multi-year lows. We believe this economically
irrational behavior is due to a frantic effort to produce an
M&A transaction in hopes of somehow rebutting our call for a
sale of the Company. We have never opposed (and have in fact
supported) accretive acquisitions by Air Methods, although we don’t
see how they will alter the Company’s larger fundamental issues
that we have painstakingly laid out and which the Board has yet to
address. But if we’re correct about the share non-repurchase – and
we’ll soon find out when the Company reports 3Q15 earnings – then
it will provide yet another demonstration of the Board’s inability
to properly account for the costs it’s imposing upon shareholders
through its single-minded fixation on the Company remaining
independent.
The Board’s continuing refusal to perform its
responsibilities implicates more than simply its competence.
One must ask why the Board is so resistant to even entertain a
potential sale of the Company. Of course, such an outcome would
eliminate its expensive “public company overhead,” including its
ten-member Board. Presumably the directors really enjoy these seats
– four of them have held them for more than twenty years each. And
it’s easy to see why: The average director received $314,360 in
2014 Board compensation; the Chairman raked in a cool $425,740.
These are extravagant payments, particularly for such a relatively
small company and especially when evaluated in the context of their
recipients: With two exceptions, all of the directors are either
retired and/or self-employed; with the same two exceptions, none
sits on any other public Boards; three are over 70 years old (one
of those is over 80). As we detailed in the Second Letter, the
independent directors have also been very heavy sellers of Company
stock. Shareholders are entitled to question whether directors’
personal needs are impairing their ability to act in shareholders’
best interests.
The Board desperately needs professional advice. We have
repeatedly urged Air Methods to retain a credible financial advisor
to assist in evaluating all options to enhance shareholder value.
Its failure to do so is particularly inexcusable in light of its
simplistic, and often errant, grasp of key concepts. These include
its misunderstanding of how equity investors balance risk and
reward in a small capitalization stock such as Air Methods; its
inability to distinguish between real and nominal valuations; and
its mispricing of risk. The Board also labors under some fairly
significant M&A misunderstandings such as its devotion to the
myth that premia in private equity transactions are capped at 25%;
that one should only initiate a sales process when trading at a
52-week high; and other such flumadiddle.
Incredibly, having refused to address a single point raised in
any of our meetings or detailed letters, the Board has floated a
request that we deliver our financial models to the Company for
inspection. That’s exactly why the Board needs an advisor – so it
can obtain professional advice and analysis, instead of relying on
our word or its own intuition. Rather than dabbling with such
gamesmanship, the Board should get on with the work at hand.4
The Board should expect shareholders to hold it
accountable. The Board has surrounded itself with an
armamentarium of entrenchment devices designed to limit
shareholders’ influence.5 Yet three of its ten directors still must
stand for reelection in 2016. These include the Chairman, Mr.
Kikumoto, who has been a director for 11 years; Mr. Belsey, the
Company’s former CEO, its Chairman until October 2011 and a member
of the Board since 1992; and Mr. McNair, a director since 1996.
They and their colleagues should remember that a Company sale is
neither an admission of failure nor a defeat. Many great companies
are built, achieve success and reward their owners along the way
until reaching the point where value can best be maximized through
a change of control. The approximately 50% increase in shareholder
value that our analysis suggests is achievable would be such an
outcome and should be sought rather than dreaded. What better way
for a very long-standing Board, such as this one, to go out on a
high-note and in grand style?
On the other hand, some companies (and directors) overstay their
welcome, and shareholders suffer as the asset begins to decline in
value. A strong Board recognizes this turning point and embraces
the opportunity that it represents, while a weak one fails to see
it or, even worse, stubbornly attempts to resist it. Shareholders
are about to discover which type of Board they have elected at Air
Methods and will decide whether it properly represents their best
interests going forward.
Respectfully yours,
VOCE CAPITAL MANAGEMENT LLC
J. Daniel PlantsChief Investment Officer
About Voce Capital Management LLC
Voce Capital Management LLC (“Voce”) is a fundamental
value-oriented, research-driven investor. Founded in 2011, the San
Francisco-based firm is 100% employee-owned.
1 See, e.g., Oppenheimer (September 16, 2015) (“Voce Capital
Management references a private market value for Air Methods of
$55-60/share. This is consistent with our report from May 8, 2015
that suggested the same value range. . . . [W]e continue to believe
this company is undervalued and the pursuit of strategic
alternatives would unlock that value. . . .”); William Blair &
Co. (September 16, 2015) (“[O]ur analysis indicated a similar $54
price target as reasonable in an LBO scenario.”).
2 Our Third Letter drew a slightly longer non-response that said
essentially the same thing (i.e., nothing). It too filled less than
a page.
3 Following the brief spike in the stock after we released the
Second Letter, the stock has fallen 7.2% while the S&P 500
(represented by the SPY ETF) has risen 2.3% (covering September
17-October 19, 2015). Some 30% of the Company’s shares were sold
short as of September 30, 2015, the most recent reporting date.
4 We’d like to believe this ploy originated from a clever
advisor rather than the Company itself.
5 The Company has adopted a “staggered” Board with three-year
terms, a prohibition on shareholders’ ability to call special
meetings or solicit consents, an inability of shareholders to
remove directors and a plurality election standard which reelects
directors even if they fail to receive a majority of the votes
cast. None of these represent best governance practices and, taken
together, reflect an autocratic governance posture at odds with the
Board’s mellifluous tune about receptivity to shareholder
concerns.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20151020006038/en/
Sloane & CompanyElliot Sloane/Dan Zacchei, 212-486-9500
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