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Adeptus Health Inc (OTCMKTS:ADPTQ) A Possible Turnaround Play

Adeptus Health Inc (OTCMKTS:ADPTQ) A Possible Turnaround Play
Written by
Jarrod Wesson
Published on
May 3, 2017
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Adeptus Health Inc. (OTC: ADPTQ), the health care provider, was recently targeted by activist investor, Wexford Capital LP. The fund decided to try to extract value from the company's bankruptcy, which was voluntarily filed on April 19, 2017. Additionally, Deerfield Management is planning to acquire the company's assets. This news created large expectation in the investment forums. Thus, we believed that regular subscribers would appreciate reading about this name. Have a look at the share price collapse in 2016, and 2017.SourceBusiness and Financial StatementsAdeptus Health Inc. was incorporated in Delaware on March 7, 2014. It is the owner of Adeptus Health LLC, which operates a health care business, providing freestanding emergency rooms and partnerships with other health care providers. According to the annual report, the company's "predecessors began operations in 2002". Additionally, it owns First Choice Emergency Room, which is said to be the nation’s largest and oldest network of freestanding emergency rooms. The company's operations are located in Texas, Colorado, Arizona, Louisiana and Ohio. In total, the company claims to run 93 freestanding facilities, and two fully licensed general hospitals as of June 30, 2016.SourceRecent DevelopmentsThe buyer: Deerfield ManagementOn April 19, 2017, the company announced an agreement with Deerfield Management, under which the Deerfield has planned to acquire the company. The Wall Street journal published an article about it. We could find out, thanks to other sources, that the merger is subject to some conditions including the bankruptcy court approval of Adeptus Health's plan of reorganization, which we will assess later. Adeptus' Board of Directors seems to welcome the transaction, because Gregory W. Scott, Chairman & Interim Chief Executive Officer of Adeptus Health, stated the following in the press release:

"We are excited about partnering with Deerfield to help us continue caring for our patients and improving our business. Deerfield brings a flexible combination of expertise, capital and a passion for quality healthcare that offers the potential to fundamentally elevate our business" Source

Additionally, we also saw that the buyer had also acquired $212.7 million in loans of ADPTQ. Have a look:

"The Company has been informed that on April 3, 2017, funds advised by Deerfield Mgmt, L.P. (“Deerfield”) acquired the $212.7 million aggregate principal amount of outstanding loans (including the Bridge Loans (as defined below)) under the credit agreement, dated of October 6, 2015, by and among the Company’s subsidiary First Choice ER LLC (the “Borrower”), the guarantors named therein (together with the Borrower, the “Loan Parties”), the lenders named therein and Bank of America, N.A., as administrative agent " Source

We believe that Deerfield, which has over $8 billion in assets, is trying to extract money from the company's bankruptcy plan. It owns debt and will also buy the company when the bankruptcy plan is accepted. In our opinion, there is conflict of interest in this situation. Deerfield may try to decrease the value of the equity in order to buy the company at a cheaper rate once Adeptus exits bankruptcy. In these kind of situations, activist hedge funds usually step in.13D Activist FundsOn April 27, 2017, several funds filed a 13D and claimed that the "shareholders of the company would receive no distribution or interest in respect of their equity interest in the Issuer and that unsecured creditors would receive only interests in a litigation trust", which was unfair according to the fund managers. The investment funds believe that the "Proposed Plan does not fairly reflect the value of the Issuer's estate and is not in the best interests of the Issuer's creditors or interest holders." To sum up, as we mentioned earlier, the debt holders are trying to obtain the company's assets without really paying the previous shareholders of the firm.The amount of shares owned by the 13D filers:

  • Debello Investors LLC (2.47%)
  • Wexford Spectrum Investors LLC (7.41%)
  • Wexford Capital LP (9.88%)
  • Wexford GP LLC (9.88%)
  • Charles E. Davidson (9.88%)
  • Joseph M. Jacobs (9.88%)

But, what is the value hidden in this company?It is difficult to estimate the amount of assets that the company hides in the balance sheet, as the last time the company reported financial statements was in 4Q 2015. If we take into account these financial figures, the company is trading at a substantial discount to its book value per share, which is $15.86. In addition, the cash per share is close to $0.37 per share.The company's share price is $0.592. Thus, according to these numbers, the share price seems undervalued. Additionally, in our opinion, given the business of Adeptus, we don't believe that the company can lose such a large amount of its net assets in such a short period of time. In addition, the business model seems to be simple; it is difficult to hide assets or cook the books.This vision was also shared by other investment analysts, like this one in Seeking Alpha, who is since long the stock. Furthermore, remarkable short sellers covered their position long time ago. To sum up, smart analysts seem to agree with our thesis.Other institutional investorsOther institutional investors, including the buyer ‘Deerfield Management’, bought the company long time ago. Have a look:Prescott Group Capital Management, L.L.C.1,696,544Dec 30, 201610.35%12,961,596Deerfield Management1,600,861Dec 30, 20169.76%12,230,578BlackRock Fund Advisors1,199,556Dec 30, 20167.32%9,164,607Morgan Stanley1,153,379Dec 30, 20167.03%8,811,815Franklin Resources, Inc1,111,571Dec 30, 20166.78%8,492,402TPG-Axon Capital Management LP1,103,172Dec 30, 20166.73%8,428,234Sterling Fund Management, LLC1,009,813Dec 30, 20166.16%7,714,971Vanguard Group, Inc. (The)868,248Dec 30, 20165.30%6,633,414Deutsche Bank Aktiengesellschaft810,464Dec 30, 20164.94%6,191,944Guggenheim Capital, LLC602,111Dec 30, 20163.67%4,600,128SourceConclusionAdeptus has lost a lot of value and many shareholders should be thinking that the acquisition of the company by Deerfield Management is opportunistic and unfair. Due to this reason, the group of activist investors is claiming a fair Plan of reorganization. Subscribers should understand that making an investment in this company may be very profitable, but it also involves some risks, because we don't really know much about the assets inside the company. To sum up, try to stay alert and follow the company by using our services or other investment tools, because a turnaround could lead to big profits if the activists get their way. We will be updating our subscribers as soon as we know more. For the latest updates on ADPTQ, sign up below!Disclosure: We have no position in ADPTQ and have not been compensated for this article.

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