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Porter Orlin LLC Submits Letter to the Board of Directors of Matrixx Initiatives, Inc. Relating to the Proposed Acquisition of

^{Published on 2011-01-11 13:36:10 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--On January 10, 2011, Porter Orlin LLC, a New York-based registered investment adviser and shareholder of Matrixx Initiatives, Inc. (NASDAQ: MTXX), sent a letter to the Board of Directors of the Company regarding the Companya™s announcement on December 14, 2010 of (i) its entry into a merger agreement with certain affiliates of H.I.G. Capital, LLC (aHIGa) and (ii) the Boarda™s recommendation that shareholders accept HIGa™s related tender offer at a price of $8.00 per share. The letter expresses Porter Orlina™s belief that the proposed transaction severely undervalues the Company and will deprive shareholders of the full value of their investment.

"commit[ment] to executing the Companya™s long-term business plan"

The full text of the letter follows:

January 10, 2011

VIA FEDERAL EXPRESS

Mr. William C. Egan, Chairman of the Board
Mr. William J. Hemelt, Chief Executive Officer and Director
The Board of Directors, Matrixx Initiatives, Inc.
8515 E. Anderson Drive
Scottsdale, AZ 85255

Dear Madam and Sirs:

Porter Orlin LLC and its affiliated entities are holders of 1,162,000 shares of common stock of Matrixx Initiatives (the aCompanya), or approximately 12.4% of the shares outstanding, making us the largest current shareholder according to publicly available data. We are writing to express our puzzlement and extreme dissatisfaction with the Companya™s announcement on December 14, 2010 of (i) its entry into a merger agreement with affiliates of H.I.G. Capital, LLC (aHIGa) and (ii) the Boarda™s recommendation that shareholders accept HIGa™s related tender offer at a price of $8.00 per share. We believe this proposed transaction severely undervalues the Company and will deprive shareholders of the full value of their investment in MTXX.

The Companya™s own financial projections reveal the extent to which the HIG transaction undervalues the Companya™s business. In the Companya™s Schedule 14D-9 filed with the SEC on December 22, 2010, management forecasts that MTXX will report net income of $6.1 million (or $0.65 per share based on the current share count) for FY 2013, which is the first year we see the Companya™s true underlying earnings power given the recent legal settlement; and net income of $7.5 million for FY 2015, which represents a two-year CAGR of more than 10 percent. In addition, managementa™s revenue forecasts suggest that the Company will generate significant excess net cash over the next several years. We consider managementa™s forecasts quite conservative, and they are well below our internal projections; nonetheless, they clearly indicate a Company value of considerably more than $8.00 per share. Additionally, there are ample general and administrative expenses that could be cut following any acquisition, not to mention other potential sales and marketing synergies with a strategic acquirer. These prospective savingsa"which are not exclusively achievable by HIGa"make the HIG transaction multiple even less commensurate with the value of the Company than it appears.

The inadequacy of the $8.00 tender offer is especially pronounced due to its being coincidental with the Companya™s recent settlementa"disclosed on the same day the HIG transaction was announceda"of the bulk of the pending nationwide product liability litigation against the Company and Zicam. The valuation uncertainty caused by the outstanding litigation had depressed the Companya™s share price significantly over a lengthy period. An $8.00 per share sale of the Company at the very moment this uncertainty has lifted snatches from shareholders the emergent current and future enterprise value of MTXX.

We also question how the Boarda™s endorsement of an $8.00 offer by HIG is consistent with the Boarda™s previously expressed view of what an acceptable transaction would be. According to the Schedule 14D-9, on August 24, 2010, the Board authorized management and its financial advisor to aadvise HIG that , although the Company was not for sale and management remained committed to executing the Companya™s long-term business plan, the Company Board would be willing to consider a transaction at a value somewhere in excess of $8.00 per share.a Recall that the Board took this position before the litigation settlement had occurred and, seemingly, before the impact of a potential settlement could even have been factored into an acceptable per-share price: the Schedule 14D-9 indicates the first discussion with HIG of potential settlement terms occurred in November 2010. Why is the Board now eager to sell at a price below what it considered acceptable on August 24when, since that point, the S&P Index is up over 20% and Matrixx has settled the most material outstanding risk to the Company? And what has happened to the Boarda™s acommit[ment] to executing the Companya™s long-term business plana? We remain confused by the Boarda™s unanimous approval of this deal in its current form.

Our concern about the proposed HIG transaction is heightened by the timing of the tender offer and acquisition, which strongly limits the possibility of competing bids. While the merger agreement includes a ago-shopa period, the timeframe for competing bids to emerge is far too brief to give shareholders a realistic opportunity to get the best price for the Company. The go-shop is 40 days and encompasses two large holidays, while the currently proposed deal took almost a year to negotiate.

In sum, given the recent litigation settlement and the Companya™s positive underlying fundamentals, we believe the Company is now stronger than it has been at any point in the past 18 months. There is no need at this point for a salea"and most certainly no rationale for a sale at $8.00. In the latter regard, we note that since the proposed transaction was announced, over 6.3 million shares have changed hands at greater than $7.98 per share, most of them well above $8.00. We would hope that unless shareholders receive fair value for their shares they will not tender them to HIG. The currently offered price of $8.00 per share is simply highly inadequate.

If, as it appears, management does not have the desire to manage the Company for any extended period of time, we urge that if and when the tender offer fails, a full and proper auction process of the Company should take place. In the meantime, we will be considering all options for obtaining fair value for our shares.

Sincerely,

A. Alex Porter Paul E. Orlin