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.