Activist investor fights HeartWare’s $766m Valtech buy

Activist investor Engaged Capital, a recent backer of HeartWare International (NSDQ:HTWR), is trying to block the implantable heart pump maker’s $766 million buyout of Valtech Cardio.

The deal for Valtech calls for an up-front payment of 4.4 million shares of HeartWare stock, plus potential milestones of 800,000 shares when Valtech’s Cardioband annuloplasty device wins CE Mark approval in the European Union and another 700,000 shares on the earlier of 1st-in-human implants for either the Cardioband tricuspid or CardioValve device.

Framingham, Mass.-based HeartWare will also put up warrants for 850,000 shares at $83.73 apiece once Valtech’s annual sales reach $75 million and a cash-or-stock earnout of $375 million once revenues reach $450 million. At yesterday’s closing price of $54.13 per share, that amounts to $765.5 million, a far cry from the deal’s $929 million value as of Sept. 1, when the deal was announced. HTWR shares are off some -33.8% since their $81.81 closing price that day, although the stock had rebounded 4.5% today in mid-afternoon trading, rising to $56.54 per share.

In a letter sent today to HeartWare’s board, Engaged Capital managing member Glenn Wellin wrote that the Valtech deal is a distraction from HeartWare’s core left ventricular assist device business, dilutes shareholders and drains cash.

“We urge the board to walk away from this highly dilutive, highly risky acquisition and return the company’s focus to the core left ventricular assist device business,” Wellin wrote. “Further, the board should be under no illusion that HTWR’s destiny is anything other than an eventual sale to a larger medical device company. There is no credible standalone plan that, on a risk-adjusted basis, will generate as much value as a sale to a strategic acquirer. The recent acquisition of the company’s only competitor and the significant interest shown in the asset validate our assertion. However, the decision to approve the acquisition of Valtech leaves us concerned that the board does not understand, or worse yet, is actively attempting to thwart, this inevitable outcome.”

The investment firm has a history of agitating for change at medical device companies, having initiated a proxy war at Volcano ahead of its $1.2 billion acquisition by Royal Philips (NYSE:PHG).

HeartWare said it’s fully committed to the Valtech deal based on “our deep experience in the advanced heart failure market, the years of diligence we conducted on the mitral and tricuspid valve regurgitation markets, and the company’s unique perspective on Valtech gained through our investment since 2013.”

“Valtech’s differentiated mitral and tricuspid repair and replacement platform deepens our leadership in the advanced heart failure market and establishes us as a dynamic player in 2 of the highest-growth categories in this market today.  The acquisition positions HeartWare for significantly accelerated revenue growth and provides a platform to expand our margin profile substantially over time.  Since announcing the transaction, we have received overwhelmingly positive feedback from physicians who are excited about Valtech’s Cardioband, which recently received CE Mark approval, and the combination of HeartWare and Valtech,” the company said in a press release.