A shake-up on Cardinal Health’s board could pave the way for activist fund Elliott to create value

Business: Cardinal Health is simply a distributor of pharmaceuticals, a planetary shaper and distributor of aesculapian and laboratory products, and a supplier of show and information solutions for health-care facilities. The institution operates done 2 segments: (i) pharmaceutical and (ii) aesculapian proviso and distribution. The pharmaceutical conception has astir $165 cardinal successful gross (91%) and the aesculapian conception has astir $16 cardinal (9%) successful revenue. The institution is the smallest of the apical 3 largest cause distributors (who unneurotic marque up 90% of the market), down AmerisourceBergen and McKesson. 

Stock Market Value: ~$19B ($69.89 per share)

Percentage Ownership: n/a

Average Cost: n/a

Activist Commentary: Elliott is simply a precise palmy and astute activistic investor, peculiarly successful the exertion sector. Their squad includes analysts from starring tech backstage equity firms, engineers and operating partners. When evaluating an investment, they besides prosecute specialty and wide absorption consultants, adept outgo analysts and manufacture specialists. They often ticker companies for galore years earlier investing and person an extended unchangeable of awesome committee candidates.

Cardinal is simply a institution that consists of 2 businesses with nary existent synergies. The pharmaceutical concern is 1 of 3 companies successful an oligopoly and is increasing faster than its peers, expanding gross by 14% past year. Pharmaceutical peers commercialized astatine 10 to 11 times EBITDA portion Cardinal is trading astatine conscionable 8 times EBITDA. This is due to the fact that of operational issues and missteps, chiefly successful the aesculapian segment. They made the mistake of sinking wealth into this conception done acquisitions but were ne'er capable to run those assets. Now this conception has astir $16 cardinal of revenue, but was unprofitable this past 4th aft historically having up to $800 cardinal successful EBITDA.

There are respective opportunities for worth instauration here. This should commencement with selling disconnected immoderate non-core assets. In the pharmaceutical business, Nuclear and Precision Health Solutions is an unrelated market-leading plus that could beryllium spun off. In the aesculapian business, Cardinal Health at-Home Solutions, which the institution bought a decennary ago, has grown good and is successful a ripe marketplace for acquisition. This could springiness Cardinal currency to hole up the 2 businesses aft the institution has missed EPS guidance six quarters successful a row.

However, each of these initiatives should beryllium done with a reconstituted board. That was made wide successful August when Cardinal announced that Mike Kaufmann (who had a 30-year tenure astatine the company) was stepping down arsenic CEO and would beryllium succeeded by CFO Jason Hollar. The determination came with nary informing oregon communication, and the committee promoted the CFO to the CEO position. Meanwhile, Hollar has ne'er worked successful wellness attraction earlier Cardinal, wherever helium has been for lone 2.5 years. He was astir precocious CFO astatine Tenneco, an car parts company, and astatine Sears Holdings earlier that. One of the main functions of a firm committee is to analyse and effect CEO succession. It appears that the Cardinal committee conscionable phoned this 1 in. Hollar whitethorn beryllium the close CEO for the company, but this modulation should lone hap aft a afloat hunt process. Moreover, interior CEO succession mostly makes much consciousness for a institution that is doing large and the enforcement is acceptable to retire, not a institution that is an underperformer and abruptly parts ways with its leader.

The other, and possibly champion option, for this institution is simply a strategical review. Last year, a radical of backstage equity firms teamed up to bargain Medline Industries, a nonstop rival to Cardinal's aesculapian business, for $34 billion. With $20 cardinal successful revenue, Medline is simply a small bigger than Cardinal's business. We are not implying that Cardinal's aesculapian part is worthy anyplace adjacent that, but Cardinal's full institution endeavor worth is lone $20 cardinal and Medical is the overmuch smaller division. Moreover, astatine the 10 to 11 times EBITDA aggregate that Cardinal's pharmaceutical peers get, its pharmaceutical division's $2 cardinal of EBITDA could beryllium worthy astir $20 cardinal to $22 billion, attributing antagonistic worth to the aesculapian division.

Ken Squire is the laminitis and president of 13D Monitor, an organization probe work connected shareholder activism, and helium is the laminitis and portfolio manager of the 13D Activist Fund, a communal money that invests successful a portfolio of activistic 13D investments. Squire is besides the creator of the AESG™ concern category, an activistic concern benignant focused connected improving ESG practices of portfolio companies.