HearUSA, Inc. (AMEX: EAR) selling hearing aids through 175 company-owned centers, its e-commerce website and a network of independent partners. The company trades (as of 5/16) for $0.305/share vs book value per share of $0.47 (as the most recent balance sheet, Dec 25 2010 so admittedly out of date). The stock has lost approximately 2/3 of its value this year, and the story behind this decline is perhaps one of the strangest I’ve come across.
First, the cast. EAR’s major shareholders include:
- Siemens Hearing Instruments, Inc the division of Siemens AG (NYSE: SI) responsible for hearing aids. This division owns (as of the SC-13D filing on 3/17) 14.1% of EAR.
- Arcadia Capital Advisors, LLC, an activist hedge fund which owns (as of the SC-13D filing on 3/18) 9.5% of EAR.
Second, the background. EAR and SI have had a long-standing relationship. SI and EAR entered into a Credit Agreement in 2006 whereby SI extended a $50 million credit facility to EAR (secured by substantially all of EAR’s assets). This agreement also obligated EAR to, in the event of any asset sales, remit to SI for the purpose of reducing the outstanding balance of the credit facility, a fixed percentage of the net proceeds (proceeds less estimated expenses). They also entered into a Supply Agreement whereby EAR agreed to purchase 90% of its hearing aids from SI.
In 2009, EAR sold its Canadian operations. EAR calculated the amount it owed SI based on the net proceeds. It is important to note that there is some subjectivity in this calculation, as expenses are estimated.
Finally, the current situation. On December 22, 2010, the CEO and CFO of SI’s hearing aid division informed EAR that the amount remitted was, in retrospect, not enough, and that EAR owed SI $2.26M immediately. EAR said that it would be unable to pay that amount and asked for a deferral. SI rejected the deferral and suggested that SI could, under its Credit Agreement, seize EAR’s assets (which were used to secure the credit facility). This back-and-forth was announced in SI’s SC-13D filed January 18th. The stock traded down ~38% that day.
On March 4, 2011, Arcadia entered the fray with an SC 13D noting that it had purchased 5.1% of the company. Then, in a follow-up SC 13D/A, Arcadia attached an Open Letter to Shareholders highlighting its concerns regarding SI’s actions:
… We indicated in our letter that we believed Siemens is not being a good partner to HearUSA and that Siemens’ actions intended to manipulate the share price of HearUSA. Specifically, we commented upon the misleading information and potential motivation for Siemens’ 13D SEC filing on January 18, 2011. We also pointed out questionable behavior as revealed by HearUSA’s February 3, 2011 lawsuit, filed against Siemens. Now, we would like to bring to shareholders’ attention another development, which further validates our perspective regarding Siemens’ actions.
We reached out to Siemens Hearing Aid division, at their headquarters in Piscataway, New Jersey, through their main office telephone number at (732) 562-6600. We were informed by Siemens that Mr. Brian Kinnerk (“Kinnerk”), the Chief Executive Officer of Siemens Hearing Instruments in the Americas, is “no longer with the company.” We were surprised, as we had not seen a press release from Siemens announcing this departure. We visited the Siemens website (link provided below) to verify this news, and discovered that Kinnerk’s profile had been removed from the website and there is still no official communication from the company. This suggests to us that Siemens AG, the corporate parent of Siemens Hearing Instruments, might finally be viewing the situation as we do. From our perspective, the recent predatory strategy of the Siemens Hearing Aid division required a change in management. At this time, we urge Siemens to take two further actions:
- Release an amendment to their 13D, updating HearUSA shareholders on their intentions; and
- Improve its business practices to be a genuine partner in the growth of HearUSA.
On March 17, SI sent a letter announcing that it was accelerating the remaining payments under the Credit Agreement and demanding payment of $32.7M.
On March 18, Arcadia announced it had increased its holding of EAR to 9.5%.
You might be wondering why I find this so strange. Recall that SI owns 14.1% of EAR (noted above). That ownership amounted to $5.77M before SI announced it had been demanding immediate repayment of the disputed $2.26M. After the announcement, this stake declined to $3.58M, meaning that SI lost nearly ($2.19M) what it was demanding ($2.26M). At today’s price of $0.305, SI’s holding amounts to just $1.9M, so it has lost far more than its original demand. Furthermore, 90% of EAR’s hearing aid sales are SI’s products, so not only was SI suffering a decline in its equity holding of EAR, it was also putting a long-time customer in a weak position, jeopardizing future sales.
Why would a major shareholders and supplier apparently be attempting to force a company to its knees? Some suggest that this is an attempt to grab the company’s assets, allowing SI to get EAR’s retail distribution network for the amount of the current debt outstanding ($32.7M) with no added cost for the 86% of equity SI does not hold. This may be a conspiracy theory, but SI’s actions certainly seem strange. This is possibly the act of a few rogue executives (who, from the Arcadia letter, appear to have been let go!).
EAR has gained a court order restraining SI from taking possession of EAR’s assets until they have fought this case out in court. If EAR ultimately loses, shareholders would be wiped out. If EAR and SI can reach a compromise, EAR may return to a value closer to book, which would represent a greater than 50% gain (though, the balance sheet we have is outdated and given the company’s operating performance there is reason to believe it should trade at a discount to book). I find the whole situation too risky, so I am staying out of it.
Author Disclosure: No position.
Note: I think I have recreated the timeline properly, but you should check EAR’s SEC filings here.