Henry Schein can improve profits by implementing the suggestions of activist Ananym.

Company: Henry Schein (HSIC)

Health care solutions company: Business operates in two segments - health care distribution and technology and value-added services. The health care distribution segment offers consumable products, small equipment, laboratory products, large equipment, and equipment repair services. The technology and value-added services segment provides software, technology, and other services to health care practitioners, including dental practice management solutions for dental and medical practitioners, as well as solutions for orthopedic treatment of lower and upper extremities.

Stock Market Value: $9.36B ($75.08 per share)

Activist: Ananym Capital Management

Ownership: n/a

Average Cost: n/a

Ananym Capital Management is a newly launched activist investment firm based in New York. Founded by Charlie Penner and Alex Silver, the firm focuses on identifying undervalued companies with high potential and works to improve their performance. Ananym prefers to collaborate with its portfolio companies, but is prepared to engage in a proxy fight if necessary. The firm currently manages $250 million and has taken positions in approximately 10 companies.

What's happening

Reuters reported on Nov. 18 that Ananym is urging Henry to revamp the board, reduce expenses, tackle succession planning, and explore selling the medical distribution business.

Behind the scenes

Henry Schein is a leading global provider of health-care products and services to office-based dental and medical practitioners. The company operates through two segments that offer different products and services to the same customer base: (i) health care distribution and (ii) technology and value-added services. Health care distribution covers Henry Schein's distribution of dental and medical products, such as laboratory products, pharmaceuticals, vaccines, surgical products, dental specialty products and diagnostic tests. This segment, which accounts for 93.5% of net sales, is sub-divided between dental (61.1% of total net sales) and medical (32.4%). While the company's primary go-to-market strategy is in its distribution capabilities, it also sells its own corporate brand portfolio of products and manufactures certain dental specialty products. In terms of scale, the company is the global leader in dental distribution and second in medical distribution to office-based physicians. Henry Schein's other segment, technology and value-added services (6.5% of net sales) covers the sale of practice management software and other value-added products. With a market cap of roughly $9 billion, the company

Despite its leading market position, attractive market structure, differentiated value proposition, and strong earnings power, Henry Schein has not delivered any value to shareholders over the past five years on a total shareholder return basis (0%, as of Nov. 15), versus 59% for the S&P 500 health-care index and 105% for proxy peers. The main source of this underperformance is cost control. Since 2019, the company has grown revenue at a 5% compound annual growth rate and gross profit at a 6% CAGR. However, it has spent all that extra revenue and then some on operating expenses, resulting in 8% annual operating expense growth and adjusted earnings before interest, taxes, depreciation, and amortization margins falling to 8% from 10%. In 2019, the company had $10 billion in revenue, $3.1 billion in gross profit, and $916 million in EBITDA. Today, it has $12.5 billion in revenue, $3.9 billion in gross profit, and $815 million in EBITDA. The reason for this is

The company should allocate capital more effectively by using cash flow to buy back stock at current prices instead of making acquisitions or paying off debt with a 6% cost. Henry Schein has a stable cash flow and a strong balance sheet, and could increase net leverage to 3.0-times from 2.6-times to acquire more than 10% of its float today and 40% of its float through 2026, potentially increasing EPS by 50%. Additionally, the medical business presents a strategic opportunity for Henry Schein, which could be worth $2.5 billion or more in a sale and be share price accretive.

Henry Schein is a company that has gotten complacent and needs an activist to help it optimize its operations and balance sheet. While the market has allowed the company to coast, it would greatly benefit from a refreshed board with best-in-class distribution expertise. Several directors have been in their seats for over a decade, and the board lacks the necessary expertise to create a succession plan for CEO Stanley Bergman. The company has experienced a concerning level of executive turnover since 2021, making it easier for a new board to come in and create a plan for the future.

Although Ananym does not have a history of activism, we anticipate that Charlie Penner and Alex Silver, whom we know well, will work cooperatively with management to create value for shareholders. We do not expect Ananym to demand a board seat for one of its principals. However, we expect Ananym to suggest several qualified industry executives who can help make the necessary changes to create significant shareholder value from a board level. It is important to note that the investor's friendly demeanor and amicable engagement should not be misconstrued as weakness. As a fiduciary to its own investors, the firm will take whatever actions are necessary to create value at its portfolio companies. The director nomination window will open on January 21, 2025, and we anticipate that the parties will reach an agreement before then.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.