#United States #New York #Sotera Health #Nelson Labs #Firstlight Management

Firstlight Management Calls for Sale of Nelson Labs

On December 3, 2024, Firstlight Management LP formally approached the Board of Directors of Sotera Health Company (NASDAQ: SHC) with a compelling proposal to consider divesting its subsidiary, Nelson Labs. This initiative has sparked discussions about the strategic direction of Sotera Health, which operates within the critical healthcare sector, providing essential services that require scrutiny and expertise.

The Rationale Behind the Call

Firstlight Management, a notable Utah-based investment firm, expressed confidence in Sotera Health's fundamental strengths, emphasizing its sole investment position in the company. Their assessment indicates that divesting Nelson Labs could create substantial shareholder value. The firm presented a strong case for a sales process, highlighting several crucial benefits that could emerge from such a decision.

Addressing Portfolio Quality and Growth

Firstlight’s analysis indicates that although Nelson Labs exhibits potential, its growth performance has notably lagged behind its peers in the Sotera Health portfolio. Over the period from 2018 to projected 2024, Nelson Labs has experienced an annual compound growth rate in EBITDA of just 2.7%. Comparatively, this is considerably lower than Sterigenics and Nordion, which have reported growth rates of 9.8% and 8.2% respectively. Furthermore, the free cash flow growth of Nelson Labs stands at a mere 1.2% annually, raising concerns about its capacity to contribute meaningfully to Sotera Health's overall performance.

Impact of a Sale on Valuation

The Board's contemplation of the sale is further supported by the current valuation landscape. Sotera Health’s trading multiples are notably discounted, at about 9.6 times its 2025 estimated EBITDA, which is well below the average of 15.2 times EBITDA seen in similar transactions within the industry. Firstlight argues that successfully selling Nelson Labs at a premium would not only highlight the undervaluation of the remaining assets within Sotera Health but also enhance the company's market perception as a whole, promoting a higher-quality portfolio.

Financial Relief and Risk Mitigation

From a financial standpoint, divesting Nelson Labs could result in significant de-leveraging for Sotera Health. Firstlight estimates that such a transaction could yield approximately $1.1 billion in gross proceeds. Adjusting for operational costs and strategic tax offsets, net proceeds could be around $1 billion. This influx would substantially lower the company’s net leverage ratio from 3.7 times to 2.2 times based on projected 2024 EBITDA figures. Reduced debt levels would not only provide fiscal breathing room amid concerns over potential future litigation but would also position Sotera Health favorably against its peers in the healthcare sector.

Enhancing Operational Focus

Moreover, Firstlight posits that the current operational challenges facing Nelson Labs have diverted significant management resources. After several attempts to rehabilitate the subsidiary, including cross-selling initiatives with Sterigenics, it has become increasingly clear that Nelson Labs may not be optimally managed under the current structure. This warrants a strategic pivot toward strengthening the core businesses of Sotera Health, primarily its sterilization services, where there exists an opportunity to capitalize on growing demand amid industry-wide shifts.

Conclusion

The arguments presented by Firstlight Management make a persuasive case for reassessing the role of Nelson Labs within the Sotera Health portfolio. As the landscape continues to evolve, it may be prudent for Sotera Health’s Board to thoroughly evaluate this proposal. By embracing such a strategic direction, the company stands to gain not just in terms of financial metrics but also in operational efficiency and improved focus. As investors await further developments, the potential for a public announcement regarding a strategic review process for Nelson Labs remains highly anticipated.