Voce Capital gets angry with Air Methods – again

Voce Capital gets angry with Air Methods – again

1-Feb-2017 Source: Voce Capital Management LLC

Voce Capital Management LLC (“Voce”), one of the largest and most committed long-term stockholders of Air Methods Corporation (“Air Methods” or the “Company”) (Nasdaq:AIRM), today sent a letter to the Board of Directors (the “Board”) of Air Methods. In the letter, Voce outlines its view that urgent change is needed to reverse Air Methods’ dismal underperformance and to unlock stockholder value.

The full text of Voce’s letter follows:

“January 30, 2017

Members of the Board of Directors
Air Methods Corporation

Englewood, Colorado 80112

Lady and Gentlemen:

Beginning in the summer of 2015, Voce Capital Management LLC (“Voce”), one of the largest and most committed long-term stockholders of Air Methods Corporation (“Air Methods” or the “Company”), invested months meeting with you and management outlining our concerns about the destruction of stockholder value at the Company. While the tenor of those meetings was amicable, they produced no results. We then sent you a series of private communications and, when those also failed to catalyze action by you, we reluctantly began communicating with you publicly. In the face of continued stonewalling by the Board of Directors (the “Board”), we were left with no choice but to commence a proxy contest last year. Even then, we nominated only two Directors for election at the 2016 annual meeting, despite the fact that we could have nominated more.

On March 22, 2016, we entered into a Cooperation Agreement (the “Cooperation Agreement”) with you in which we agreed to withdraw our 2016 Director nominations and suspend our campaign for change for one year. In exchange, you agreed to appoint one new independent Director and to take all necessary actions to de-stagger the Board so that Directors would be elected to one-year terms going forward. The standstill to which we agreed as part of the Cooperation Agreement afforded you time to demonstrate an awareness of, and capacity to address, acute stockholder dissatisfaction with corporate strategy and results. In our view, the Cooperation Agreement created a probationary period in the hope that it would usher in positive change, but if it did not we would be free to pursue much more sweeping changes in 2017, if necessary. Unfortunately, that is where we find ourselves now, as the situation at Air Methods has only deteriorated since our entry into the Cooperation Agreement:

Air Methods continues to destroy stockholder value. Stockholders suffered a -24% loss on Air Methods’ stock in 2016. During this time, the Russell 2000 (of which Air Methods is a constituent) appreciated 21% – a relative underperformance of almost 50 percentage points in just one year! Air Methods’ appalling 2016 results come on the heels of stockholder losses of -4.8% in 2015 and -24.4% in 2014, compounding to a -45% loss in the prior three years. As a result, Air Methods has underperformed the Russell 2000, S&P 500 and its own self-selected group of “Proxy Peers” for the past one-, three- and five-year periods.

Air Methods’ deep undervaluation persists, but there’s no reason to expect that will change on its own. Even after its recent bounce off of multi-year lows, Air Methods currently trades for less than seven times EBITDA, and twelve times earnings, based on consensus estimates for 2017 – a significant discount to its intrinsic value. Its stock price volatility was just as high in 2016 as in prior years, despite efforts to dampen it. Air Methods’ shocking short interest, at approximately 30% of its float, hovers near record territory and is a constant reminder of how challenging it will be for the stock to gain any sustained upward traction. Some of the Company’s largest and longest-tenured investors have begun to lose faith, as evidenced by the material reductions in their ownership.

Serious operational issues have emerged. In addition to the Company’s multi-year struggles with its runaway DSOs and incessant volatility, new issues have come to light in recent months. The Company badly missed its projections early in 2016, ultimately having to rescind its full-year EBITDA guidance of ~$350 million (which it had originally promoted as “conservative”). Integration missteps in its rash acquisition of Tri-State Care Flight also surfaced, raising questions about the quality of its due diligence process. Perhaps of greatest concern, the Company has experienced persistent softness in same-base-transport volumes. The inability to pinpoint the cause of this deterioration has unnerved the investment community and provided an additional leg to the short thesis that is likely to blunt the benefit of any reduction in DSOs that might occur. Finally, it appears to have made little progress in 2016 in negotiating in-network arrangements with its largest payors, despite identifying this as a strategic priority last year.

The Board’s interests remain misaligned with stockholders’. As we’ve previously noted, the excessive tenures, lack of skin in the game, absence of other Board roles and experience, and gratuitous payments have compromised, in our view, the objectivity and independence of many of the Directors. Of greatest concern, the independent Directors have been inveterate sellers of Company stock. In the past ten years, the current group of independent Directors has been a net seller of 1,230,612 shares while purchasing a mere 12,500 shares (a sell/buy ratio of 99:1). Notwithstanding Air Methods plumbing multi-year lows during 2016, only one Director purchased any Company stock in the open market: Joseph E. Whitters, Voce’s nominee, who was appointed last year and bought 7,500 shares (more than $250,000) with his own capital. No other Air Methods Director has purchased a single share of Air Methods since 2013, and that lone purchase (5,000 shares, which were then erased by a subsequent sale of 15,000 shares by the same Director one year later) constitutes the only purchase by a Director within a full decade.

The Board has not dealt with us in good faith. On November 18, 2016, we traveled to Denver to meet with the Chairman, Mr. Kikumoto, to discuss our concerns about Air Methods’ strategic drift, operational missteps and severe stock price underperformance.1 Mr. Kikumoto promised to discuss our suggestions promptly with the Board and committed to us that they would be considered in good faith. The Company then requested a formal proposal from us, which we submitted within one day and in which we sought additional changes to the Board so that work could begin immediately to address our concerns and unlock stockholder value. Despite repeated requests by us for a response, the Board sat on our proposal and then, three weeks later, simply rejected it out-of-hand, and without any negotiation, despite having solicited the proposal from us in the first place and having told us that it was open to working with us. We have received no further communications from the Board since that time. We also learned that the Board had, during the time when it was purportedly considering our proposal, instead retained a proxy solicitor to take select members of the Board on an investor roadshow on January 17-18, 2017 – coincidentally when the standstill imposed upon us by the Cooperation Agreement expired. The Board appears to have been more focused on its own interests – preening itself in front of investors and girding for another battle to further entrench itself – rather than genuinely considering Board reform or negotiating with us in good faith.

The Board still has no credible plan to create stockholder value. When we met with Mr. Kikumoto, we were extremely disappointed that he was unable, despite repeated questions, to identify a single actionable step that the Board was taking to increase stockholder value. We then attempted to illustrate for him why most of the traditional value creation avenues upon which Air Methods had relied – capital allocation, M&A and others – were either unavailable, faced declining utility or had been explicitly disavowed by management. Mr. Kikumoto asked no questions about our analysis and offered no response. We’ve gathered from other stockholders that the Board’s recent roadshow, starring Mr. Kikumoto and Mr. Tobhaz, was similarly devoid of substantive content.

The Board did not fulfill its obligations under the Cooperation Agreement. As noted earlier, the Board agreed to take all necessary action to de-stagger the Board at last year’s annual meeting so that going forward Directors would face annual elections (the “Amendment”), a commitment we had insisted upon during the negotiations over the Cooperation Agreement in an effort to improve the Company’s corporate governance practices. Per the Company’s charter, passage of the Amendment required 80% of the shares outstanding to vote in favor of it. In our view, the Board did not faithfully fulfill its contractual obligation to pursue passage of the Amendment, beginning with its initial failure to even retain a proxy solicitation firm for the annual meeting. (It ultimately hired a solicitor, but only after we formally registered our concerns about the Company’s failure to do so.) As a result, while 98% of the shares that were represented at the annual meeting voted in favor of the Amendment, it failed to pass because the Board’s inadequate solicitation efforts resulted in less than 80% of the shares outstanding being represented at the meeting – the first time we can identify that the Board’s solicitation efforts have failed to attract at least 90% of the shares for an annual meeting of the Company! Even after the bungled solicitation, had it truly wished to de-stagger itself the Board could have simply adjourned the meeting so that the few remaining shares necessary for approval could have been rounded up. It chose not to do so.

* * *

The Board’s actions since the entry into the Cooperation Agreement have convinced us that it is either unwilling, or unable, to manage the urgent issues Air Methods now faces. The time for incremental tweaks has long passed, and stockholder patience is exhausted. Reactive or ad hoc maneuvers, such as last year’s shotgun acquisition of Tri-State and eleventh hour Board reshuffle, won’t fly this time around. Much more sweeping changes are required, including substantial reform of the Board and strategy, and we intend to pursue them vigorously. Should the Board continue to refuse to work with us, we shall seek to elect new independent Directors at the 2017 annual meeting with the proper incentives, experience and fortitude to confront these challenges and to faithfully represent the stockholders for whom they stand as fiduciary.

Respectfully yours,


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