Northstar Neuroscience Inc (NASDAQ:NSTR) is a net cash stock that has announced that it plans to liquidate. NSTR closed yesterday at $1.91, giving it a market capitalization of $50M. We estimate its net cash value to be around 30% higher at $2.49 or $65.1M. The final pay out figure in the liquidation will be slightly lower. We estimate that figure at around $59.1M or $2.26 per share, which presents an upside of around 18%. The liquidation is still subject to stockholder approval and the upside isn’t huge, but NSTR presents a reasonable prospect for a good return in a short time frame.
About NSTR
The company’s most recent filing in relation to the liquidation attaches the following press release:
Northstar Neuroscience, Inc., (NASDAQ:NSTR), a medical device company developing therapies for the treatment of major depressive disorder, today announced that its Board of Directors has determined, in its best business judgment after consideration of potential strategic alternatives, that it is in the best interests of the Company and its shareholders to liquidate the Company’s assets and to dissolve the Company. The Company’s Board of Directors has approved a Plan of Complete Liquidation and Dissolution of the Company (the “Plan”), subject to shareholder approval. The Company intends to hold a special meeting of shareholders to seek approval of the Plan and will file related proxy materials with the Securities and Exchange Commission (“SEC”) in the near future. Prior to the special meeting the Company will reduce its headcount to a limited number of employees who will assist in the termination of operations.
The Plan contemplates an orderly wind down of the Company’s business and operations. If the Company’s shareholders approve the Plan, the Company intends to file articles of dissolution, satisfy or resolve its remaining liabilities and obligations, including but not limited to contingent liabilities and claims, ongoing clinical trial obligations, lease obligations, severance for terminated employees, and costs associated with the liquidation and dissolution, and make distributions to its shareholders of cash available for distribution, subject to applicable legal requirements. Following shareholder approval of the Plan and the filing of articles of dissolution, the Company would delist its common stock from NASDAQ.
The value proposition
As the press release mentions, NSTR is being wound down. The September 10Q shows value on the balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):
NSTR’s value is predominantly cash and short-term investments in the amount of $68.3M or $2.61 per share. With total liabilities of only $3.9M or $0.15 per share, NSTR had a net cash value in September of around $64.4M or $2.46 per share. If we assume that NSTR used around $4M in cash last quarter and it costs circa $2M to wind up the company, we estimate it will pay out around $59.1M or $2.26 per share.
The Catalyst
NSTR was prompted to liquidate at the urging of RA Capital Management, which sent the following letter (annexed to its last 13D filing) to the company on December 15 last year:
Board of Directors
c/o Alan Levy, Ph.D., Chairman of the Board
Northstar Neuroscience, Inc.
2401 Fourth Avenue, Suite 300
Seattle, Washington 98121
Dear Members of the Board of Directors:
We continue to be shocked and frustrated by the complete lack of response from Northstar Neuroscience, Inc. (the “Company” or “Northstar”) to the several options it has to preserve and return value to its stockholders. As you know, we sent a letter to each of you on July 14, 2008, in which we outlined a reasonably detailed proposal on how the Company could stop its hemorrhaging of cash, provide a distribution to its stockholders, and sell its remaining assets for as much value as possible. Since July, the Company’s stock, which was then trading at an astonishing 30% discount to its cash balance per share, has fallen by nearly 50% and continues to trade at an even more appalling 60% discount from its cash balance per share. Although you have refused to return capital to shareholders, you have put forth no viable business plan for the Company. It would seem that some of you remain content to pay yourselves salaries from cash that belongs to stockholders while contributing nothing of any positive value in return.
While we acknowledge that you have recently taken some steps to reduce expenses, we reiterate that now is not the time for half-measures. Your reduction of expenses slows value destruction but does not permit the recovery of shareholder value reflected in the Company’s cash balance. If your strategy is to arrange for a white knight to acquire the Company at a premium to cash, that is not a strategy but more like hope and a prayer given the current economic environment and market circumstances. The credit crisis and market collapse we have witnessed since July have made investors and companies much less willing to pay for all but the most valued of strategic assets. The Company’s failed programs hardly qualify as strategic assets; in fact, the market has clearly assigned them a negative enterprise value (approximately -$1.40/share, which offsets $2.40/share in cash to yield the current $1.00/share for the stock). The only asset of value that the Company possesses is its cash; this asset should not be wasted and ought to be returned to shareholders as soon as possible that they might invest it more profitably.
Our July 14, 2008 letter speaks for itself and your silence, inaction, and inability to offer any other options are increasingly alarming. Any options you might have thought you had in July have since disappeared. We also want to make clear that any attempt by you to merge or otherwise combine with any other public or private company, thereby inflating the enterprise value of the combined entity without increasing the share price for your existing stockholders, would further erode any potential value in Northstar shares that could be realized through a cash dividend or share buyback. If a merger or acquisition of another company or asset were put to a stockholder vote, we would vote against such a proposal and believe that other stockholders would likely prefer to have their capital returned to them.
We again urge you to make a distribution or dividend to your stockholders as soon as possible, preferably announcing your intention to do so prior to the end of the year. We believe that most investors have realized losses this year and that a large cash dividend would likely not have significant tax consequences for most investors. Alternatively, we urge you to craft and implement a share buy-back program, which would also have the effect of raising the share price and allowing stockholders the opportunity to salvage some of the value of their investment, possibly more tax efficiently than via a dividend. If you indeed feel that the long term prospects for the Company are good, then buy-out any stockholders who do not share your same view. Again, we expect you to take prompt action, including making a decision on these matters prior to the end of the year.
If you do not wish to take any of the actions outlined above because you have doubts about whether doing so is in the best interests of the stockholders, then we urge you to call a Special Meeting of the stockholders and simply ask your stockholders directly. After all, you owe fiduciary duties to your stockholders and they continue to see the value of their investment decline in the face of your inaction.
Alan J. Levy, you are the Chairman of the Board of Directors and therefore hold a leadership position alongside John S. Bowers, Jr., making you particularly responsible for the direction of this company. However, we also specifically recognize the role that each of the members of the board play. Susan K. Barnes, you have a responsibility to speak out against the waste of shareholder capital. Michael Ellwein, your position with Three Arch and history at Medtronic would suggest that you have not always made a career of value destruction, so we can hardly imagine that you are comfortable letting it happen at Northstar, and yet the situation continues to deteriorate. Albert J. Graf, you must be frustrated about the lack of any results from the Company’s management, and yet have you done all that you can to protect shareholders from management’s poor judgment? Robert E. McNamara, as a career CFO who ought to have an appreciation for fiscal responsibility, you are permitting Northstar’s disrespect for its shareholder’s capital to continue to the detriment of your professional reputation. Dale A. Spencer, you have had a long relationship with the Company, since 1999, but you are also a private investor, and we have to believe that some part of you is disgusted by the idea of Northstar management continuing to collect generous salaries while running an enterprise that the market has valued well below zero for nearly a year. Carol D. Winslow, what should the investors whose capital you manage at Channel Medical Partners LP conclude about your acumen and values as a business person if you continue to sit passively by while Northstar’s management transfers the wealth of its investors into the bank accounts of its executives without creating any positive equity value whatsoever? How long will each of you allow this to continue? We urge you to immediately solve this problem once and for all.
We recognize that shareholders of the Company have little influence; you have the safety of a staggered board and Washington state laws of incorporation, which make a travesty of corporate governance and fiduciary duty. Shareholders can only hope that you have the decency to give them a chance to express their wishes to you formally if you will not take immediate action to protect the value of their investment in the Company through a dividend or share buyback. While you certainly have challenged our notion that boards represent the interests of the shareholders, we remain optimistic that, with some persistence, shareholders can prevail on even the most intransigent management and board to listen to their concerns and protect their investment or personally pay back shareholders for what, in our opinion, is a gross dereliction of fiduciary duty.
Unless we hear from you by Friday, December 19, 2008, that you intend either to take the actions urged above or call a Special Meeting of the stockholders as urged above, then we intend to submit and vigorously pursue shareholder proposals for your next annual meeting. These proposals will, among other things, seek input from your stockholders on the issue of a distribution or dividend and/or share buy-back program and will put forth a slate of new candidates to be elected to your board of directors at that meeting.
We intend to pursue our interests here aggressively, both for our benefit and hopefully for the benefit of all stockholders, including preserving our right to take legal action against you and the Company.
Sincerely,
RA Capital Healthcare Fund, L.P.
By: RA Capital Management, LLC, its general partner
Peter Kolchinsky
Managing Member
The board has now agreed to put the proposal to liquidate to NSTR stockholders. We won’t know management’s estimate for the likely distributions until NSTR files the Plan of Complete Liquidation and Dissolution of the Company in anticipation of the special meeting of stockholders. As NSTR’s value is predominantly in cash and short-term investments, the liquidation should be a relatively straight-forward exercise.
Conclusion
At $1.91, NSTR is trading at an 18% discount to our $2.26 estimate of its distributions in the proposed liquidation. We will have a better estimate for the likely distribution when the company files its Plan of Complete Liquidation and Dissolution of the Company. While the upside isn’t huge, and there is still some small risk that the plan will not be approved by stockholders, we think NSTR presents a reasonable prospect for a good (but not great) return in a short time frame.
NSTR closed yesterday at $1.91.
The S&P500 Index closed yesterday at 843.74.
Hat tip to commenter manny for the tip.
[Full Disclosure: We do not have a holding in NSTR. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
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