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Company: Elanco (ELAN)
Business: Ilanco is one of the largest global animal health pharmaceutical companies, developing and marketing products for both pets and farm animals. It provides pet health prevention products, such as parasites and vaccines that protect pets from worms, flies and ticks under the brands Ceresto, Advantage, Advantics and Advocate; Pet health treatments for pain, osteoarthritis, ear infections, cardiovascular and dermatitis in canines and felines under the Galliprint and Claro brands; Vaccines, antibiotics, parasites, and other products for use in poultry and aquaculture, as well as effective nutritional health products, including enzymes, probiotics, and prebiotics; And a range of vaccines, antibiotics, implants, parasites and other products used in the production of Ruminant and Swine under the brands Rumensin and Bytril.
Stock market value: 15.6B (শেয়ার 33.15 per share)
Staff: Starboard standards
Percent Ownership: 1.61%
Average cost: n / a
Staff Comment: Starboard is a highly successful activist investor and has extensive operational experience to help board and management teams manage more efficiently and improve margins. They have filed 103 13D. In these 103 filings, they received a return of 33.9% as against 13.3% for the S & P500. Their average 13D hold time is 18 months.
What’s going on?
On Oct. 2021, Starboard expressed confidence that Elanco Animal Health Inc (ELAN) has the opportunity to increase margins through operational improvements.
Behind the scenes:
Alanco came out of Eli Lilly in September 2018 and met with a lot of excitement – the stock closed + 50% on the first day of trading. The reason the stock was so well received was that it managed to increase revenue at or above the growth rate of the management industry and promote the opportunity to improve margins by about 1,000 basis points in five years. In 2018, Ilanco’s EBITDA margin of 21% vs. 38% for Joetis, his closest peer. In addition, Joetis was a relevant case study for Alanco because it also came out of a large company and the management was able to implement its value creation plan, resulting in Joetis’ stock price surpassing S & P500 by 330% since the IPO.
Alanco Management has targeted a 1% EBITDA margin by 20223. The management of the company has seen that its strategy will not depend on other big contracts and it will focus on implementation in its own pipeline. However, on August 20, 2019, Alanco announced the acquisition of the nearly 6 7.6 billion Bear Animal Health business, which surprised the market and reduced the stock by 24%. Alanco explained this acquisition because it is very good for the opportunity to pass because it will significantly expand the scale and change the mix of businesses. As a result, management accelerated its margin target deadline by one year and announced that due to this acquisition they would reach their 31% EBITDA margin by 2022.
After the acquisition, Elanco and Zoetis had near-scale and more similar geographic / portfolio blends, but, Elanco (including buyers) margins were below Zoetis, whose EBITDA margin was 40% by 2019. Approved, Zoetis had some valuable products with high pricing potential With that leads to higher profit margins than Alanco, but that’s why Alanco set a target of 31% instead of 40%. But then, in 2020, management revised its guidelines, saying it now expects to achieve a 1% EBITDA margin by 20224, one year after its first launch and two years after its last launch.
To further confuse and frustrate shareholders, management has claimed that they have realized significant cost savings, but are not expanding margins as a result. Instead, the gap between Alanco and Joetis remains: 2,455 basis points in 2020 and 2,086 basis points for 2021. This results in a lack of confidence in the implementation of management, low stock prices and multiple margins with large margins and Joytis trading at 26x 2022E EBITDA and Elanco 18x. This gap can be bridged through improved operational execution, which will provide more confidence from shareholders and lead to an improved valuation. Starboard’s analysis estimates a stock price of 47 47 and multiple improvements for Elanco with a 31% EBITDA margin and a stock price of $ 74 with a 31% EBITDA margin and a multiple value equal to Joetis. With a better margin improvement of 37.1%, Starboard sees a potential $ 91 stock price.
It’s important to remember that Starboard is not the only Elanco employee. In October 2020, Sachem filed a 13D with Head Alanco. In December 2020, the company negotiated with Alanco for three board seats for Scan Ferguson, Paul Harendin and William Doyle. Starboard has given the company some time to work with these new managers and will probably give it more time, but at some point the board and management will have to show that they can run. Starboard is not the only shareholder who is clearly disappointed. At last year’s annual meeting, there were significant votes against each director for election আর্ Art Garcia (46.34%), Dennis Scots-Knight (46.54%), Jeffrey Simmons (37.04%) and William Doyle (21.09%).
Alanco has a huge opportunity to build shareholder value through margin improvement and Starboard has extensive experience in improving the margins of portfolio companies from the board level. Starboard won’t be able to nominate a director until January 2022, but that seems like a logical situation to invite to Starboard, so hopefully it won’t come.
Ken Square is the founder and president of 13D Monitor, an institutional research service on shareholder activism and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D investors. Owned by Elanco Fund.