Matrixx Bought By Private Equity Firm H.I.G., Settles Personal Injury Lawsuits

Matrixx Initiatives announced Dec. 14 private equity firm H.I.G. Capital will acquire the Scottsdale, Ariz.-based maker of Zicam cough/cold products for approximately $75.2 million.

Matrixx also said it settled the bulk of pending personal injury cases related to its Zicam intranasal zinc products.

Minimum Or Fair Offer?

• H.I.G. offers Matrixx shareholders $8 per share, a 56.3% premium over the stock's Dec. 13 closing price.

• Roth Capital analyst says the offer is "a fair minimum," and $13 to $14 per share "could equate to a fair price."

H.I.G. expects to begin a tender offer Dec. 22 to shareholders of $8 per share, a premium of 56.3% over the stock's Dec. 13 closing price, Matrixx said in a release.

The offer will expire the 20th business day following the start of the offer or Jan. 24, 2011, whichever is later. If the tender offer is successful, H.I.G. then will complete a second-step merger and convert any outstanding Matrixx shares into an offer equivalent to the one extended during the tender offer.

The Matrixx board of directors unanimously approved the offer.

Under the terms of the agreement, Matrixx may solicit other acquisition offers until the end of the day on Jan. 22, the company said in the release.

In an interview, CEO Bill Hemelt declined to discuss any aspects of the bid solicitation, citing federal regulations. He said the companies will file documents in a week to 10 days detailing those conversations.

Roth Capital analyst Scott Henry said the $8 per share offer is "a fair minimum bid" and, based on Matrixx's likely earnings per share, a bid of $13 to $14 per share "could equate to a fair price."

"The one caveat is that litigation overhang (despite a settlement) could reduce potential suitors and result in below-market prices," Henry said in a same-day note.

H.I.G New To Consumer Products

The bulk of H.I.G.'s holdings are business services. It owns a few companies that operate in the broader health care sphere – including one that provides services to workers' compensation claimants – but none that provide products directly to consumers.

According to its web site, the firm manages more than $8.5 billion of capital in funds for private equity, venture capital, distressed debt, real estate and public equities.

H.I.G. has offices in Miami, Atlanta, Boston, New York and San Francisco and affiliate offices in London, Paris and Hamburg, Germany.

Hemelt declined to speculate on what H.I.G. would do with the firm should the offer succeed.

Settlement "Complete As Possible"

Matrixx also announced it settled the "bulk" of its pending personal injury lawsuits from consumers alleging the loss of sense of smell and/or taste after the use of Zicam products.

Under the settlement, more than 1,000 plaintiffs and 1,100 claimants will dismiss or release their cases with prejudice. In return, Matrixx will pay a total of $15.5 million – $11.5 million immediately after the satisfaction of certain qualifications, and another $4 million in two installments within the next 21 months, the company said in a separate release.

The settlement "was designed to be as complete as possible," Hemelt said. "Obviously, individuals can decide whether they want to participate or not."

Matrixx has pending litigation on three fronts – economic and personal injury claims, as well as a pending shareholder lawsuit that will be argued at the Supreme Court Jan. 10 (Also see "Government Weighs In For Shareholders In Matrixx Supreme Court Case" - Pink Sheet, 22 Nov, 2010.).

The company previously announced a settlement of most of the pending economic injury claims. The presiding court asked for more information in early November before it would approve the agreement (Also see "Matrixx Misled Shareholders About Zicam Problems, Investors Allege" - Pink Sheet, 15 Nov, 2010.).

The H.I.G. offer will not affect the pending Supreme Court case, Hemelt said.

Matrixx filed a reply brief Dec. 13 refuting many of the points made by shareholders and their supporters, including the U.S. government (see story p. 16).

Depending on how Matrixx fares in its various legal disputes, H.I.G. may end up on the hook for additional costs.

"Once the deal closes, the litigation responsibility would go to them along with all the assets and liabilities in the company," Hemelt said.

In recent quarters, Matrixx's earnings have been hampered both by a slow cold/flu season and mounting litigation costs (Also see "Matrixx Expects Income Turnaround From Seasonal Sales" - Pink Sheet, 1 Nov, 2010.).

By Carolyn B. Phenicie