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Company: Cooper Companies (COO)
Business: The Cooper Companies is a global medical device company. It operates in two business units: CooperVision and CooperSurgical. The CooperVision segment is involved in the contact lens industry, while the CooperSurgical segment is involved in the fertility and women’s health care market through its diversified portfolio of products and services, including fertility products and services, medical devices, cryostorage (such as cord blood and cord tissue storage) and contraception. CooperVision’s products include MyDay daily disposable, MyDay daily disposable toric, MyDay Energys, MyDay multifocal, Biofinity & Biofinity XR, Biofinity Energys. CooperSurgical’s portfolio includes INSORB, Lone Star, and the Doppler Blood Flow Monitor. It also offers a suite of single-use cordless surgical retractors with an integrated multi-light-emitting diode (LED) light source and dual smoke evacuation channels, and single-use surgical suction devices with an integrated, cordless radial LED light source.
Stock Market Value: $14.41 billion ($72.49 per share)
Activist: Jana Partners
Ownership: n/a
Average Cost: n/a
Activist Commentary: Jana is a very experienced activist investor founded in 2001 by Barry Rosenstein. They made their name taking deeply researched activist positions with well-conceived plans for long term value. Rosenstein called his activist strategy “V cubed.” The three “Vs” were: (i) Value: buying at the right price; (ii) Votes: knowing whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, they have gradually shifted that strategy to one which we characterize as the three “Ss”: (i) Stock price – buying at the right price; (ii) Strategic activism – sale of company or spinoff of a business; and (iii) Star advisors/nominees – aligning with top industry executives to advise them and take board seats if necessary.
What’s happening
On Oct. 20, Jana announced that they took a position in Cooper Cos. and plan to push for strategic alternatives, including a potential transaction to combine its contact lens unit with peers such as Bausch + Lomb.
Behind the scenes
Cooper Cos. is a leading global medical device company operating through two segments: CooperVision and CooperSurgical. CooperVision (66% of revenue) is focused on the sale of contact lenses. CooperVision is the global leader by contact wearers and second in terms of market share (26%), competing against Johnson and Johnson (37%), Alcon (26%), and Bausch + Lomb (10%).
The global soft contact lens market is estimated to be worth about $11 billion and is growing at 4% to 6% annually. The segment has numerous tailwinds including a steady shift into silicone hydrogel 1-day lenses (about 40% of consumers are still using non-daily lenses), global growth in contact users, and high barriers to entry for competitors. As such, this is a great business that generates EBITDA margins in the mid-30s.
CooperSurgical (33% of revenue) is focused on women’s health services, with 60% of its fiscal year 2024 revenue derived from office and surgical (Paragard IUDs, stem cell cryostorage, medical devices) and 40% from fertility (IVF consumables, equipment, genomic and donor services). Fertility treatment is a $2 billion global market, also expected to grow at a 4% to 6% pace annually.
For most of its history, Cooper was a pureplay vision business, until they added CooperSurgical in the 90s. Initially, this was a small – arguably tax-motivated – add-on. However, the company began heavily investing in this segment in 2017 – spending over $3 billion on the segment since.
The problem with this shift is pretty clear – Cooper is effectively siphoning off cash from a really good contact lens business and then reinvesting it in what most people would judge to be a less attractive business. This is evident in the company’s declining returns on capital, with CooperSurgical now operating at lower margins than they did in 2017 despite these massive investments.
A key factor behind this operational shift may be management changes. The company’s CEO Albert White, who previously led CooperSurgical, assumed leadership shortly after this expansion began. This raises a larger question about the company’s strategic focus, leading many to question why the leader of this company would not have expertise in its core business.
These strategic missteps have been further compounded by near-term headwinds across both segments, some self-inflicted. For CooperVision, the company mismanaged market expectations for the rollout of its new daily lens product, MyDay Energys, which is now behind schedule.
For CooperSurgical, its highest quality business, IVF, has slowed meaningfully, likely attributable to comments from President Donald Trump suggesting potential reimbursements for IVF costs, causing patients to delay treatment in anticipation of this potential coverage. As a result, top-line organic growth fell meaningfully below expectations to 2%, down from 7% the prior quarter, forcing Cooper to significantly lower its full-year guidance at its third-quarter earnings call, sending the company’s share price down 12.85% the following day. Now, Cooper is trading at a 12-month forward P/E of 16.4x — a steep discount to its 10-year average of 23.1x.
All of this has prompted Jana Partners to announce a top portfolio position in Cooper and plans to push for strategic alternatives, including a potential transaction to combine its contact lens unit with peers such as Bausch + Lomb. While a transaction of this nature would typically raise some antitrust concerns, this may actually be the opposite case here.
First, a merger would not result in a market leader, as the combined market share of 36% would be just below market leader J&J’s share of 37% and not too far ahead of Alcon’s 26% share.
Secondly, these businesses are highly complementary with minimal geographical and product overlap, suggesting a reduction in the likelihood of regulatory hurdles. Notably, Bausch + Lomb has not been shy about their potential interest and also sees no regulatory issues, as CEO Brent Saunders has publicly stated that a potential combination with Cooper would “strengthen competition and create a more scaled company in the contact lens segment.”
But Bausch + Lomb is not the only potential acquirer. Companies like European eyewear manufacturer EssilorLuxottica could also have interest and with even less regulatory uncertainty.
As for CooperSurgical, there would certainly be private equity interest, as evidenced by Blackstone and TPG nearing a deal to acquire peer Hologic. However, Cooper shareholders may realize more value from the company cleaning up this portfolio internally – focusing more on the higher-multiple IVF business, shedding certain non-core assets, and potentially putting in new operators to execute a strong turnaround.
Overall, with short-term headwinds likely to ease, Cooper has multiple avenues to recover its discount and open itself up for a potential rerating. Jana’s thesis is straightforward: these two businesses make no sense under the same roof and a strategic combination for the vision business could yield $300 million to 500 million synergies, which is a lot for a business with $850 million in EBITDA. But step one in their plan is convincing management that separating the two businesses is the right strategic move; and despite growing public attention, there is no guarantee that management, especially with this type of operating history, will agree.
Should management resist, this campaign changes dramatically from a strategic thesis to a leadership/governance thesis, likely centered on appointing a new CEO with a deep background in the contact lens industry to refocus the company on its core, while still positioning it for a separation down the line.
Jana is not outwardly calling for a management change and White may even be the best person to lead a standalone CooperSurgical business. But activism is about the power of the argument and Jana seems to make a persuasive one here. Let’s hope for all involved that management sees it that way.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.