4.02.2019

10 Years Goes By Fast

On April 2nd, 2009 I sat down to write a post on distressed debt entitled "What is distressed debt investing?"


The blog celebrates its 10 year anniversary today. 

A lot has changed in ten years. My wife and I celebrated our own 10 year anniversary late last year, we have two wonderful kids (girl and a boy), my beard is more salt than pepper (let's be honest, almost all salt) and somehow, magically, and with the help of so so many people, I am blessed to have built Reorg into what it is today.

I cannot thank each of you individually. I wish I could. I am so lucky to have gotten to know and build relationships with many of you and its been amazing to see your careers develop in this industry in which we all love. Its also been great to see a new generation of investors rise up over the past ten years and take a few of the lessons from the blog and apply it to their investing or advising activities. I am grateful for all of your support over the years.

Finally, I am truly humbled to lead Reorg every day. Taking a phrase from Warren Buffett, I tap dancing to work everyday. I have never been more excited for the future of Reorg - its amazing what the team of nearly 200 people are accomplishing, building and striving for to inform and empower our customers each and every day. I am grateful that I get the opportunity to work with each of you as we push forward through 2019 and beyond.

Thank you. Truly, thank you so much for everything. Here's to another amazing ten years!

-Kent


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2.28.2019

Reorg M&A Coverage of NXTM/FMS FTC Approval

Reorg's M&A product has really taken off of late with expanded coverage of all things merger and merger arb related. Here is an example of one of our stories in February. To get a trial of the product please reach out to your sales contact at Reorg, me or click here: https://reorg.com/trial/





February 20, 2019 06:00



Relevant Documents:
FTC Press Release
Complaint
Analysis of Agreement Containing Consent Order to Aid Public Comment
Decision and Order
Statement of Chairman Simons, Commissioner Phillips, and Commissioner Wilson
Statement of Commissioner Chopra
Statement of Commissioner Slaughter

Takeaways
 
  • The FTC voted 3-2 to approve the transaction with divestiture to B. Braun. All five commissioners contributed to statements regarding the consent. Democratic Commissioners Rebecca K. Slaughter and Rohit Chopra individually wrote dissents, and the Republican majority responded with their own statement.
  • Slaughter noted her “strong reservations” about the vertical aspects of the transaction, and she expressed concern that the merger creates a “monopoly or near-monopoly position.” Meanwhile, Chopra noted the FTC had “clear evidence that the transaction will delay or inhibit entry by new firms.” He suggested that Fresenius “could achieve cost savings and other benefits through sourcing and supply agreements” rather than through the acquisition of NxStage.
  • Chairman Joseph J. Simons, Commissioner Noah Joshua Phillips, and Commissioner Christine S. Wilson wrote that the evidence did not support a conclusion that Fresenius would foreclose or raise rivals’ costs. On the contrary, the transaction could lead to much greater use of home hemodialysis, they predicted. Further, both CVS Health and “at least one other firm” are expected to offer home hemodialysis machines in the relatively near future, they wrote.
  • The complaint and accompanying settlement come more than 18 months after the merging parties first announced the transaction in August 2017.

Yesterday, Feb. 19, the FTC announced its conditional approval of the merger between Fresenius and NxStage. The commissioners voted 3-2 along party lines, indicating that other merger reviews could face prolonged investigations or otherwise become politicized within the agency.

All five commissioners contributed to statements regarding the consent, with Commissioner Rebecca K. Slaughter and Commissioner Rohit Chopra issuing dissents and Chairman Joseph J. Simons, Commissioner Noah Joshua Phillips, and Commissioner Christine S. Wilson offering a statement in support of the commission’s action.

The announcement of the settlement represents the conclusion of an exceptionally long FTC review. The transaction was initially announced on Aug. 8, 2017, and received a second request in October of that year. The complaint and accompanying settlement come more than 18 months after the merging parties first announced the transaction.

Dissenting Statement of Commissioner Slaughter

Although Commissioner Slaughter noted her agreement with the FTC’s allegation of harm to horizontal competition in the bloodlines market, she wrote that she also has “strong reservations about the competitive implications of the vertical aspects of this transaction.” Slaughter described the current hemodialysis markets as “highly concentrated” and expressed concern that the merger creates a “monopoly or near-monopoly position” in both at-home and in-center dialysis machines. Further, entry barriers are significant, she wrote.

According to Slaughter, Fresenius may have a profit incentive “to foreclose or raise the costs of its rivals” post-acquisition. “Indeed, the investigation indicated that these strategies could be profitable for Fresenius,” she wrote. Slaughter urged the FTC both to monitor competition levels in dialysis markets and to conduct a retrospective study of the transaction’s effects.

Overall, Slaughter’s statement is consistent with the views she expressed in her Essendant/Staples dissent. In that case, she offered similar comments on vertical mergers, stating that “they present an enforcement challenge that we must meet.” She also raised concerns in her Essendant/Staples dissent that “the current approach to vertical integration has led to substantial underenforcement.” Specifically, she was concerned that the agency’s conclusions are dependent on “unreliable assumptions and predictions about how a vertically integrated firm will conduct itself” and give too much weight to claimed efficiencies of vertical mergers. Slaughter also called for a retrospective study of the Essendant/Staples transaction.

Dissenting Statement of Commissioner Chopra

Commissioner Chopra in his dissent noted that “vertical mergers can choke off entry by innovators by shrinking the potential market to a point where it doesn’t make economic sense for a new business to launch.” Fresenius and DaVita are “essentially a duopoly” in the operation of hemodialysis clinics, Chopra wrote. Further, Fresenius is already vertically integrated.

The NxStage acquisition “essentially eliminates the potential for sales to Fresenius, since Fresenius will have little incentive to purchase in-home hemodialysis machines from a competitor,” Chopra wrote. As a result, fewer companies will be able to bring home dialysis machines to market. “There was clear evidence that the transaction will delay or inhibit entry by new firms,” Chopra noted. The long-term consequences could be “severe,” he wrote. He also raised the question of whether Fresenius “could achieve cost savings and other benefits through sourcing and supply agreements” rather than an outright acquisition of NxStage.

Additionally, Chopra pointed out that the FTC did examine the horizontal overlaps that existed in a transaction between two companies with the only FDA-approved home hemodialysis machines. However, the agency’s discussion of this issue has not been made available to the public. Chopra suggested that the FTC “should look to provide more transparency in the analysis made available to the public, such as a discussion of the analyses conducted regarding potential anticompetitive effects, data relied upon to justify a remedy (or lack thereof), and discussion of entry conditions post-transaction.”

Statement of Chairman Simons, Commissioner Phillips and Commissioner Wilson

The FTC “thoroughly and extensively” scrutinizes vertical mergers involving concentrated markets, Simons, Phillips and Wilson wrote. In this instance, the evidence “did not support a theory of harm” other than in the area of bloodlines, they noted. “To the contrary, the investigation—including information gathered from a number of current and potential market participants—showed that the transaction would likely increase the sale of NxStage’s in-home machines and thereby improve health outcomes by making in-home hemodialysis available to more qualifying ESRD patients.”

The evidence did not support a conclusion that Fresenius would foreclose or raise rivals’ costs, they wrote. More likely, the transaction could lead to much greater use of home hemodialysis, they predicted.

With respect to market entry, Simons, Phillips and Wilson pointed out that the announcement by CVS Health to offer a home hemodialysis machine came long after the public announcement of the NxStage/Fresenius transaction. Further, “the evidence showed that at least one other firm is likely to enter in the relatively short term,” they noted. The NxStage acquisition could actually increase market entry, in the eyes of the majority.

Finally, Simons, Phillips and Wilson wrote that FTC staff did examine a “potential horizontal overlap” between NxStage and Fresenius in home hemodialysis machines. However, the Fresenius “Baby K” machine is not regarded by customers as a substitute for the NxStage at-home machine, and the Baby K has not affected the pricing of the NxStage machine, they noted.

The Complaint and Proposed Settlement

Product Market

The FTC defined the market in the complaint as “no broader than the development, manufacture, marketing, distribution, and sale of bloodline tubing sets compatible with hemodialysis machines indicated for chronic renal failure treated in dialysis clinics.”

According to the FTC’s analysis of the consent agreement to aid in public comment, there are “no viable alternatives to bloodline tubing sets for hemodialysis equipment.” There are three companies that are “significant suppliers” of bloodline tubing sets in the U.S. The FTC asserts that Fresenius is the leading provider with 59% share of the market, NxStage has 23% and Nipro has 16%. Other players in the bloodline tubing set market, consisting of 2% of the total market, are small firms supplying proprietary bloodlines for closed architecture hemodialysis machines. Fresenius, NxStage, and Nipro supply open architecture hemodialysis machines.

Geographic Market

The FTC defines the relevant geographic market as the U.S. The logic here is straightforward - because the product market involves medical devices which are regulated by the FDA, medical devices sold outside the U.S. that are not FDA-approved are not viable substitutes for U.S. consumers.

Competitive Effects

The FTC argues that the merger, without the proposed remedy, would “substantially lessen competition in the relevant market in violation of Section 7 of the Clayton Act.” The lessening of competition would manifest, according to the commission; (1) by eliminating “actual, direct, and substantial competition” between Fresenius and NxStage in the market for bloodline tubing sets for hemodialysis machines; (2) by increasing the merged firm’s ability to unilaterally raise prices in the relevant market; and (3) by reducing the firm’s incentives to improve quality and innovation in the market.

The FTC’s analysis describes the potential for anticompetitive effects in simple terms - the merging parties are two of three significant players in the relevant market. By eliminating the competition between Fresenius and NxStage in a highly concentrated market, the surviving company would be able to, by itself, raise prices, reduce innovation, and lessen consumer choice.

Entry

The complaint asserts that entry in the market would not be “timely, likely, or sufficient in magnitude, character, and scope to deter or counteract the anticompetitive effects of the Acquisition.”

New entrants are required to invest significant time and capital to research products, obtain necessary FDA approvals, and establish the infrastructure necessary to sell, market, and service the offering. Such product developments, according to the FTC, “are difficult, time-consuming, and expensive, and often fail to result in a competitive product reaching the market.”

The Settlement 

The FTC’s consent requires the companies to divest to B. Braun “all assets and rights to research, develop, manufacture, market, and sell NxStage’s bloodline tubing sets.”

The FTC’s decision and order requires Fresenius and NxStage to provide support services “sufficient to enable [B. Braun] to operate the Hemodialysis Bloodline Assets in substantially the same manner that Respondents have operated such assets prior to the Acquisition.” The order also requires the companies to supply B. Braun with bloodline tubing sets while B. Braun establishes its own manufacturing capability.

The FTC argues that B. Braun is an appropriate divestiture buyer, asserting that the company is “well positioned to restore the competition that otherwise would have been lost due to the proposed Acquisition.” B. Braun currently operates a hemodialysis business that is “highly complementary” to the assets that are subject to divestiture.

The FTC requires that the divestiture to B. Braun be completed no later than 10 days following completion of the merger. Should there be an issue with B. Braun, the FTC will require the assets be divested to a commission-approved buyer within six months of the date of the final order.

The proposed order includes a provision that involves the appointment of a monitor to ensure the companies are adhering to their obligations. Should the companies fail to divest the relevant products, the commission can appoint a trustee to assist in the divestiture.

After the consent package is filed in the Federal Register, it will be subject to a public comment period of 30 days. The commissioners will then vote to determine whether to make the proposed consent final.

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1.08.2019

Reorg to Discuss Mexcat on Thursday, Jan. 10, at 11 a.m. ET

One of the most topical situations in credit these days in the Mexico City Airport Trust or Mexcat. Lots of debt, lots of political noise and a lot of opacity means its fascinating credit for many investors.

Reorg will be hosting a webcast on on the MexCat situation this Thursday, Jan. 10, at 11 a.m. ET. You can register attend here: MexCat Reorg Webinar

And as always, if you want to see our continuing coverage of MexCat you can request a trial at Reorg here: Reorg Trial Request

Happy New Year all!

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6.11.2018

A lot going on at Reorg

It has been an amazing 2018. For those that haven't heard:



I have never been more excited about all the amazing stuff going on at the company. From designing and deploying a new website, launching new verticals and existing products in more geographies and bringing on a world-class partner to help take us to the next level, I am ecstatic about where Reorg is headed and super proud of what we have accomplished in a little over 5 years.

With that said, the Reorg team makes it a priority to keep subscribers as well as our entire extended audience informed about what is going on at the company and its offerings (we plan on launching 3 new products in the next 6 months). We regularly release new products and features, produce insightful content such as whitepapers, infographics, podcasts and webinars. 

Please sign up to hear directly from us when we have updates and announcements to share: Reorg Marketing Sign Up

Any questions, feel free to reach out to me. And as always, thank you for the continued support!

-Kent & the Reorg Team



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2.14.2018

Reorg Research - Official Launch of Reorg Covenants Prime

In April last year, we officially launched Reorg Covenants, a product that helps market participants and their advisers understand the inherent risks and pitfalls in debt documents of the most actively traded and complex public credits and capital structures. Feedback from our subscribers has been amazing and I believe that Reorg Covenants has established itself as the best product of its kind on the market.

Today, I’m excited to announce the newest addition to our Reorg suite of products and one that I believe perfectly complements Reorg Covenants: Reorg Covenants Prime. This new service allows subscribers to send private and public debt documents to our team of analysts who will prepare in-depth, tailored reports that include commentary on the material risks associated with debt instruments and a summary of covenant packages and other key terms that are important to stakeholders. Subscribers submitting multiple debt documents for one company can also receive an analysis of the material differences between the documents.

If you are interested in Reorg Covenants Prime and would like more information, please contact us here: Reorg Covenants Prime Info Request.

As always, if you have any questions on the product or Reorg in general, feel free to reach out to me directly or your Reorg sales contact.

-Kent Collier, Founder & CEO of Reorg

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Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.