Kerrisdale Capital Management Encourages Webster Financial to Spin Off HSA Bank
- Kerrisdale encourages Webster to explore spinning off HSA Bank to unlock the value of this overlooked asset.
- Kerrisdale believes that Webster's core regional bank and health savings account (HSA) business are worth more than $46 per share, 34% above the current stock price.
- HSAs have exploded in popularity as employers and policy-makers seek to rein in healthcare costs.
NEW YORK, March 2, 2015 /PRNewswire/ -- Kerrisdale Capital Management, the beneficial owner of approximately 2% of Webster Financial Corporation, a Connecticut-based regional bank, today issued a positive report on the firm and delivered a letter to Webster Chairman and Chief Executive Officer James C. Smith, as well as Webster's board of directors, encouraging them to explore spinning off HSA Bank. Kerrisdale believes that Webster is significantly undervalued and trades at an over $1 billion discount to its fair value. Outside of its well-run regional-banking operations, Webster's HSA Bank unit is at the forefront of the fast-growing market for health savings accounts. As HSA Bank becomes a major player in its own right, Kerrisdale believes that Webster should consider strategic options that could help crystallize the value of this overlooked asset.
Kerrisdale's report is available at kerr.co/webster. The full text of its letter follows:
March 2, 2015
James C. Smith
Chairman and Chief Executive Officer
Webster Financial
145 Bank Street
Waterbury, CT 06702
cc: Board of Directors
Dear Jim,
As you know, Kerrisdale Capital Management is a proud Webster Financial shareholder. We greatly respect what you and your team have achieved over the years, building both a strong, high-performing regional bank and a trailblazing health savings account (HSA) provider that is now the clear leader in its industry. We appreciate the constructive dialogue we have had with you and your management team and applaud your openness to new ways of unlocking further shareholder value.
Despite Webster's enviable track record, the market has failed to recognize just how valuable the company is. In particular, it has yet to appreciate the multi-billion-dollar value of the HSA Bank unit, especially now that it has acquired JPMorgan Chase's HSA business and partnered with Cigna. While we acknowledge the funding advantage that HSA Bank has historically offered to Webster's commercial banking operations, we believe that Webster is now trading at an over $1 billion discount to its fair value, and we fear that its current corporate structure – combining the core regional bank and HSA Bank in one legal entity – needlessly impedes the closing of this discount. Therefore, we encourage you and the Board to explore strategic options that will both highlight and maximize the value of HSA Bank.
Given HSA Bank's already distinct customer base, business model, headquarters, and technology platform, we believe a spin-off is the most natural approach. Webster has diligently nurtured HSA Bank for years; now it is strong enough to stand on its own. The successful public offering of one of HSA Bank's competitors has demonstrated the market's well founded enthusiasm for the HSA sector; should HSA Bank require growth capital in the future, whether to support its ongoing organic expansion or to complete opportunistic acquisitions, it will enjoy a far more attractive cost of capital if it can draw on an investor base that understands the scope of its opportunities and is willing to pay a premium for long-term growth. Traditional bank investors are a poor fit.
To be sure, spinning off HSA Bank will require thoughtful coordination and planning, including regulatory approvals. In the very near term, management focus should rightly center on completing the JPMorgan integration and making the most of the combined organization's new scale. But management and the Board should carefully consider moving toward a longer-term separation. There are several issues to investigate, beginning with whether HSA Bank should serve as a standalone depository or as a custodian of deposits that remain with Webster. Management and the Board should then explore whether to pursue a full spin-off at the outset or begin with an initial public offering of a minority stake. While we know that management and the Board have analyzed such strategic options in the past, changed circumstances – HSA Bank has achieved critical mass, the capital markets have embraced similar firms, and Webster's core bank has continued to strengthen – call for a formal reassessment.
We are all aligned: no one wants to see Webster's billion-dollar undervaluation persist. Kerrisdale looks forward to further dialogue and again commends the Webster and HSA Bank teams for all of their success to date.
Sincerely,
Sahm Adrangi
Chief Investment Officer
Jordon Giancoli
Director of Research
Kerrisdale Capital Management
About Kerrisdale Capital
Kerrisdale Capital Management, LLC is a fundamentally-oriented investment manager that focuses on long-term value investments and event-driven special situations. Kerrisdale has $300 million in assets under management and is based out of New York City.
Contact
Agnes Cao
Kerrisdale Capital, LLC
[email protected]
212-257-4385
SOURCE Kerrisdale Capital Management
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