Another activist U.S. hedge fund has set its sights on MDS Inc. and says it plans to pressure the Canadian health sciences company to spin off or sell one or more of its business units to boost value for shareholders.
Obrem Capital Management LLC said in a filing with the U.S. Securities & Exchange Commission Wednesday that it has bought 5.1 per cent of MDS's shares.
Obrem said in the filing that it believes "significant shareholder value" could be created by sales or spinoffs and that it plans to "recommend" that MDS hire financial advisers to "explore strategic alternatives." The fund also said it plans to recommend that MDS "review its capital structure and pursue a significant share repurchase program."
MDS is based in Toronto. Its key businesses are contract pharmaceutical research, development and testing, the manufacture of analytical equipment and the production of medical isotopes.
It has been in restructuring mode since 2005, when institutional shareholders forced a management and board shakeup - bringing in Stephen DeFalco as chief executive officer - in a bid to breathe life back into its stock price. MDS's shares had by then fallen to about $16 from a high of nearly $32 in 2000.
One of Mr. DeFalco's most dramatic moves to date was to engineer the sale of MDS's diagnostics division for about $1.3-billion in 2006.
MDS issued a brief statement Wednesday afternoon saying it had recently had a "discussion" with Obrem. However, the hedge fund apparently did not make much headway.
"We listened to their views - and continue to believe [we are]on the right path to create value for our shareholders," MDS said.
Obrem chief financial officer John Rogers said he would have an outside public relations agency respond to questions.
Obrem has garnered some media attention south of the border in recent weeks by pushing for the sale of Micrel Inc., a California chip-maker in which it has amassed a 14.9 per cent stake.
It is hard to say how much the hedge fund will be able to achieve with MDS that its current shareholders have not.
The Canadian company already has a number of other activist funds among its owners. In fact, its largest shareholder is ValueAct Capital Partners LP of San Francisco, which now owns 18.7 per cent of the company.
Among the other hedge-fund shareholders are Farallon Capital Management LLC, also of San Francisco, with 5.1 per cent. Then there are Mason Capital Management LLC of New York, with 3.6 per cent and Iridian Asset Management LLC of Westport, Conn., with 3.2 per cent.
"It's really a continuation of a trend that has been going on for a couple of years and has really accelerated in the past year," analyst John Maletic at Scotia Capital said of Obrem's arrival at MDS. "The whole shareholder base has changed: it used to be dominated by Canadians. Now it's dominated by a lot of hedge funds and activists."
Mr. Maletic also said that while Obrem and other activists may be pressing to break up MDS, the health sciences company would have greater value if it first completes the restructuring of its largest division, contract drug researcher MDS Pharma Services. The division was raked over the coals in 2006 by the powerful U.S. Food and Drug Administration over inaccurate test results.
"I think there's still an impetus to keep the company together, at least until that division is performing adequately."
When MDS reported its financial results for the first quarter of fiscal 2008 a month ago, Mr. DeFalco said the company's overall restructuring was 90 per cent complete.
MDS reported a profit of $17-million (U.S.) or 14 cents a share in the quarter, which ended Jan. 31, as revenue climbed to $296-million from $241-million a year earlier. Profit was up from $16-million or 11 cents a share.
As it is, Obrem appears already to have made a nearly 12 per cent paper gain on its MDS holdings.
It said in the filing that it paid a total of $115.7-million for the 6.24-million MDS shares that it purchased between Feb. 22 and April 8.
But the stake was worth about $129.4-million at MDS's closing price of $20.73 on the Toronto Stock Exchange Tuesday, for a gain of $13.7-million.
The closing price was up 17 cents from Tuesday's finish and $4.58 from the stock's 52-week low on Feb. 27, and just $1.37 below the 52-week high of $22.10 it hit last May.