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Company: Azenta (AZTA)
Business: Azenta is a life sciences company that operates through two segments. The first is the life sciences product division. It offers automated cold samples management systems for biological and chemical sample storage. Also, it provides equipment for sample handling and preparation, consumables, and instruments to help customers manage their samples during research discovery and development workflows. There is also the life sciences segment which offers comprehensive sample management solutions, integrated cold chains, informatics, and sample-based lab services to support scientific research and 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. Koffey was most recently the head of activism at Senator Investment Group. Koffey led the activist practice of D.E. Shaw and Elliott Associates were his previous employers. Koffey operates Politan like a long-short hedge fund. It can access locked-up capital, allowing it to achieve its goals by actively engaging with boards and management to improve governance, operational efficiency, or strategic direction. Politan is looking for high-quality businesses that are underperforming or have potential but do not perform as well as their peers. This is Politan’s second 13D filing and third activist campaign, all of which have been in the health-care sector. This is Politan’s second 13D filing and third activist campaign, all of which have been in the health-care sector.
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’s been around for almost half a decade. It was a global leader in automation and a partner of the semiconductor manufacturing industry for decades. Azenta sold their semiconductor automation business for approximately $3 billion to Thomas H. Lee Partners L.P. on February 1, 2022. It focuses today exclusively on life sciences. The company is now the leading provider of cold storage solutions in its market. After the sale of its semiconductor business, the balance sheet of the company showed $2.7 billion in net cash. 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. They now have $1.1 billion of net cash, and a market capitalization of $3.0 billion. Investors want to know what the company plans to do with its cash. They have good reason to be worried. The market did not like the B Medical acquisition, which was completed in October 2022. The stock fell over 10% in the two days following the announcement of the deal on August 8, 2022. Azenta also missed its guidance on multiple occasions, expecting double-digit margins with strong revenue growth but falling far short. The stock has fallen from $69.01 prior to the B Medical announcement to $50.77 before Politan’s filing of the 13D, a drop of 26.4%. The S&P 500 returned 8.1% during the same period. Its problems are all related to the excess cash in its balance sheet. It is difficult to value Azenta with a third of its market capital in cash when it is unclear how this money will be used. The problem is made worse by the $500 million spent on an acquisition which was not well received by the market. Many investors are no longer interested in the company, not because they don’t believe in the management, or that management is not doing a good job, but due to the uncertainty surrounding such a large part of its assets. This same dynamic presents an opportunity to activist investors. This will help the market to feel confident that capital will be used in a way that is accretive. The market can be convinced that a company will trade at a premium if they have a shareholder representative on the board. Growth hurdles are less of a problem in absolute terms than they are relative ones. Azenta has seen its top line grow, but not at the same rate as its guidance. It can also be mitigated by adding members to the board who have experience communicating with investors. The operating margins are also significantly lower, especially compared to guidance. However, this is a common problem for companies with excess cash. When companies receive a large influx of money, they often do not have the discipline to control costs because there is no pressure to stick to a budget. This would lead to better operating margins that are more in line with management guidance. This would result in better operating margins, which are in line with the management’s guidance. Other shareholders, we believe, would also want this. It is something that management should also want. It is important to clarify something that is often misunderstood by activists: Just because Politan has filed a 13D, and the firm is meeting management does not mean it is critical. This does not mean the firm and management are not on the same wavelength. Both Politan and the management may want to do the best thing for the Azenta share price, and they both value each other’s opinions. In this case, we could see a rapid appointment to the Azenta Board. Politan, however, has demonstrated that it is confident in its investments, and won’t shy away from a proxy battle if this does not happen. We do not believe that it will be necessary, given the recent performance of the company and the facts surrounding this situation. Azenta has a director nomination deadline of Nov. 2. We won’t have to wait long for a response. Ken Squire, the founder of 13D Monitor and president of the 13D Activist Fund (a mutual fund which invests in a 13D activist portfolio), is also the founder of 13D Monitor and president. Azenta owns the fund.