Big AHP investor talks tough

Friday, March 31, 2006

DALLAS - A disgruntled shareholder in late February made a bid to buy American HomePatient for $3.40 per share--11% more than the company's closing price at the time.
Highland Capital Management, which owns 10% of AHP's stock, stated its intentions to "negotiate a mutually agreeable transaction" in a Feb. 27 letter to President and CEO Joe Furlong. If AHP fails to cooperate, however, Highland plans to "take all appropriate steps to accomplish a transaction," including seeking representation on the company's board of directors.
"We do not believe that AHP's management has substantially improved (the company's) liquidity situation or materially reduced the amount of AHP's total debt since (the company) emerged from bankruptcy in 2003, and we do not expect that AHP's prospects will improve under the current management," the letter stated.
AHP filed for bankruptcy July 31, 2002. The company had been scheduled to pay off $275 million in debt by Dec. 31 of that year, but it had nowhere near that much cash on hand. (See HME News, January 2004).
In its letter, Highland stated that its offer allows AHP shareholders to realize the company's "full value," especially in light of its "over-leveraged balance sheet" and inability to "successfully navigate the challenging Medicare reimbursement environment." The fund also pointed out that the company was, again, not well positioned to pay off debt--this time $250 million by Aug. 1, 2009.
Highland requested a response to its letter by 5 p.m. March 3. Attempts to reach Furlong were unsuccessful.
Despite Highland's threat to seek board representation, it's unlikely AHP will bite at the fund's offer, or at least not initially, said healthcare consultant Schuyler Hoss.
"The market's telling us this is an opening bid," said Hoss, president of Vancouver, Wash.-based Northwest Healthcare Management. "Because shares went up (to $3.65 per share) on news of the offer, people expect the company to seek a higher level of payment. There's also talk that other organizations are looking to put in competitive bids."
For AHP, the pros of agreeing to an acquisition could include less volatility--both in stock price and ownership. The cons: The management team might be out of a job, said Balaji Gandhi, an analyst with New York-based Oppenheimer & Co.
At the end of the day, Highland's tactics, though aggressive, are standard operating procedure, Gandhi said.
"Shareholder activism is very common," he said. "If you own 10% of a company, you feel like you should have more of a voice--not just a financial stake."
For the HME industry at large, Highland's offer represents good news, both Hoss and Gandhi said.
"It's always encouraging to me when investor groups see value in HME companies," Hoss said. "They don't buy companies because they don't see a future; they buy them because they see real opportunity."