Voce Capital owns 4.9% of Air Methods (NASDAQ: AIRM) and has put out a lenghtly letter. See below.
September 16, 2015
Members of the Board of Directors
Air Methods Corporation
7211 South Peoria Street
Englewood, Colorado 80112
Attention: Corporate Secretary
Lady and Gentlemen:
Voce Capital Management LLC and its affiliates (collectively, Voce) beneficially own 1,951,551 shares of Air Methods Corporation (Air Methods or the Company), representing approximately 4.9% of its shares outstanding, making us the Companys sixth-largest shareholder. As you are aware, we are also long-term owners of Air Methods, having been shareholders since September 2011.
In our discussions with management over the past several months, and in our meeting with you in Denver on August 3, we have expressed our concern that Air Methods public ownership structure is increasingly problematic and has led to a sharp divergence between the Companys intrinsic and trading values. While Air Methods is currently valued at approximately 7.5x its 2015E EBITDA, similar assets have been repeatedly purchased by private equity firms for approximately 10x EBITDA including its closest competitor, which has traded hands twice in the past five years (and as recently as April of this year) in that range. That would imply a private market value for Air Methods of approximately $55-$60 per share more than 50% above its current trading price.1 In our opinion this wide discount is structural and unlikely to narrow as long as Air Methods remains public.
We were encouraged to hear that you share our view that Air Methods is severely undervalued. We continue to believe strongly that the clearest and quickest path to addressing this gap and maximizing the value of Air Methods is through a sale of the Company, most likely to a financial sponsor. Nothing we learned during our recent meeting or in our subsequent discussions with you has changed this view. In fact, management is on record publicly stating its willingness to explore a privatization if the Board will simply provide its blessing. Were therefore at a loss to understand the Boards refusal to do so.
Events subsequent to our meeting have heightened our concerns and motivated this letter. Follow-up discussions with you have confirmed a lack of any intention to even consider a potential sale at this time. Instead the Board has floated a variety of other initiatives, such as acquisitions and internal succession planning (including the announcement of a process to recruit senior executives by dangling the prospect of becoming a public company CEO) that could complicate or prevent a potential sale of Air Methods. Finally, weve learned that the Board has recently received highly credible inbound private equity interest which it wont pursue.
We no longer believe the status quo is tenable or in the best interests of the Companys shareholders. The time for a public discussion of these issues has therefore arrived.
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Air Methods is the market leader in the large and attractive $4 billion air medical market, transporting some 100,000 patients per year. In addition to its nationwide footprint of 199 community and 93 hospital bases, Air Methods has a young fleet of 408 rotary aircraft and 26 fixed-wing planes, most of which are owned by the Company rather than leased. It has built a network of strong preferred provider arrangements with hospitals and a flight call center business that directs a significant number of transports to its bases. The barriers to entry are high, given the capital-intensive nature of the business, complex relationships and required flight operations expertise. A unique market structure, with little to no direct competition or group purchasing contracts, is also very attractive: Because its prices are unregulated and demand is relatively inelastic, Air Methods has been able to take price routinely.
While we continue to believe that Air Methods is a great business, it has become a rather crummy stock. Due to Company-specific issues, the shares have been under enormous pressure well before the arrival of the markets recent increase in volatility: Year-to-date the stock has fallen approximately 19% and is down a staggering 37% in the last twelve months. Its performance also badly lagged in 2014, with a negative shareholder return of 24%.
We believe that several conscious choices have contributed to this change in fortune. First, Air Methods decision to tilt more heavily into community-based service (CBS) and away from hospital-based service (HBS), while financially astute due to its superior unit economics, has rendered the Companys results far less predictable, as they depend more heavily today on variable patient volumes than they did when a higher percentage of revenues flowed from fixed-contract HBS. This has increased the volatile nature of Air Methods earnings while obscuring visibility into its performance, with its quarterly results becoming wildly unpredictable as its business mix has changed. From 2010 through 2012, Air Methods met or exceeded consensus Revenue, EBITDA and EPS estimates in eight out of twelve quarters and negatively pre-announced only once. But beginning in 2013, it missed six out of the next ten quarters and pre-announced four times. These frequent surprises have routinely, and viciously, punished the stock.
Second, as the percentage of patients covered by private insurance has deteriorated for Air Methods (and for the healthcare delivery system as a whole), it has been forced to rely upon an ever-shrinking base of commercially-insured patients, paying an ever-increasing rate for its services, to balance its books. Its success in doing so has confirmed the pricing power that it wields, but the continuous rate hikes have also engendered additional economic and political risks to the Company. As the only publicly-traded, largely pure-play air medical company, Air Methods detailed financial and operating results are available for everyone including the commercial payors now responsible for the vast majority of its revenue to dissect on a quarterly basis. Transport volumes, gross and net pricing, payor mix and collection dynamics, just to name a few sensitive items, are fully visible to Air Methods ultimate customers and paint a clear road map for those whose interests are not necessarily aligned with the Companys. Air Methods candor regarding its pricing strategy, and disclosures about its collections and the aging of its receivables, have also ignited a raging debate about whether its pricing power has ebbed or if commercial payors are beginning to push back. Not surprisingly, the already active short-selling community has piled on, adding to the stocks downdraft.
Compounding matters, the popular press now characterizes Air Methods business decisions in response to these changed market conditions as greedy and predatory.2 Ironically, this narrative depicts Air Methods as a villain that victimizes the very patients whose lives it saves, allegedly gouging them with rapacious pricing and then targeting them with aggressive collection efforts when they fail to pay. The merits of these preposterous claims are irrelevant; the granular availability of the Companys results, and its status as the only public entity in the space, make it in an irresistible target for such demagoguery. Once a company has a target placed on its back in this manner it can take years to efface it, if it is able to do so at all.
As a result of the foregoing, public investors have re-rated Air Methods to compensate for what they perceive as a lumpier, murkier and riskier business. At roughly 7.5x TEV/EBITDA, Air Methods now trades below its own five-year