DFAN14A 1 dfan14a06588004_11172006.htm Untitled Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

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RURAL/METRO CORPORATION
(Name of Registrant as Specified in Its Charter)

ACCIPITER LIFE SCIENCES FUND, LP
ACCIPITER LIFE SCIENCES FUND II, LP
ACCIPITER LIFE SCIENCES FUND (OFFSHORE), LTD.
ACCIPITER LIFE SCIENCES FUND II (OFFSHORE), LTD.
ACCIPITER LIFE SCIENCES FUND II (QP), LP
CANDENS CAPITAL, LLC
ACCIPITER CAPITAL MANAGEMENT, LLC
GABE HOFFMAN
NICOLE VIGLUCCI
(Name of Persons(s) Filing Proxy Statement, if Other Than the Registrant)

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-1-

On October 30, 2006, Accipiter Life Sciences Fund, LP (“Accipiter”), together with the other participants, made a definitive filing with the Securities and Exchange Commission (“SEC”) of a proxy statement and accompanying GOLD proxy card to be used to solicit votes for the election of its slate of director nominees at the 2006 annual meeting of stockholders scheduled to be held December 1, 2006 (the “2006 Annual Meeting”) of Rural/Metro Corporation, a Delaware corporation (the “Company”).

Item 1:  Slide presentation to shareholders.























 

 

Accipiter Capital Management, LLC

 

399 Park Avenue, 38th Floor

 

 

New York, NY 10022

 

 

 

May 5, 2006

 

Rural/Metro Corporation

Board of Directors

9221 East Via de Ventura

Scottsdale, AZ 85258

 

To the Board of Directors of Rural/Metro Corporation:

 

Accipiter Capital Management, LLC, together with its affiliates (“Accipiter”), is currently the beneficial owner of over 1,200,000 shares or approximately 5% of the shares outstanding of Rural/Metro Corporation (“Rural” or the “Company”). We believe that at current levels, the Company’s shares are undervalued and represent a compelling investment opportunity.

 

We started accumulating a position in Rural at the end of July at approximately $8.00 per share. Since that time, Rural has reported significantly improved results, cash flow and debt repayment. For example, operating income increased almost 40% year to date for fiscal 2006 compared to the same period last year. Yet the share price is essentially unchanged. As a result, the enterprise value / LTM EBITDA multiple has decreased from 9.5x last July to 8.2x currently despite no adverse change in the Company’s outlook. Moreover, Rural repaid approximately $16 million of debt since October 2005 or $0.62 per share. At a bare minimum, the Company’s share price should have appreciated by that amount. Rural’s flat stock performance since August compares with an approximate 12.5% return in the Russell 2000 index during that same time period.

 

Rural’s management team is doing a solid job operating the Company, but we believe a significant disconnect exists between Rural’s stock price and the Company’s positive business outlook due to the following two factors:

 

 

1.

Overhang from a potential equity offering.

 

 

2.

Lack of financial guidance.

 

Equity Offering: Since February 8, 2006, when Rural filed a shelf statement, the stock has decreased from $8.93, or over 10%, despite reporting strong operating results for the second fiscal quarter of 2006 the following day. Based on conversations with current and potential investors, we believe that the shelf filing has created expectations that an equity offering is imminent and will be completed at a stock price near current levels, which would be dilutive to shareholder value. These expectations directly result from the lack of clear communication from the Company regarding specific parameters for measuring accretion of an equity offering.

 

While using proceeds to repay the 12.75% senior discount notes from a secondary offering at the current stock price would be accretive to GAAP earnings, we believe that accretion should be measured on a cash earnings basis. GAAP earnings are meaningless as a valuation metric for a company such as Rural which does not pay cash taxes due to significant net operating loss carryforwards, since GAAP earnings completely ignore the resulting incremental cash stream.

 

 


 

 

Turning to free cash flow yield, we estimate that Rural will generate approximately $30 million in free cash flow or over $1.15 per share this fiscal year, equating to a free cash flow yield of nearly 15% on a stock price of $8.00. Clearly, selling equity which is yielding a 15% cash return to redeem bonds with an interest rate of only 12.75% would be detrimental to shareholder value.

 

Timeframe is also a very important parameter for determining the accretion of an equity offering. Accretion should be measured on a forward looking basis rather than on current or historical earnings, since many investors value companies based on their growth prospects. As long-term oriented investors, we believe shareholder value would be significantly impaired if Rural were to pursue an equity offering only marginally accretive to current fiscal year cash earnings, but dilutive to next fiscal year’s cash earnings.

 

We have attached a spreadsheet which analyzes the impact of an equity offering and assumes that Rural uses the proceeds to repay the senior discount notes. We estimate that at an $8.00 stock price, an equity offering would be over 6% dilutive to current fiscal year cash earnings, over 8.5% dilutive to fiscal year 2007 cash earnings and over 10% dilutive to fiscal year 2008 cash earnings. According to our analysis, a secondary offering does not become accretive on fiscal year 2007 cash earnings until the stock reaches at least $12.50 and on fiscal year 2008 cash earnings until at least $14.50.

 

In addition, we believe that Rural should not offer equity until the Company obtains adequate sell-side analyst coverage. Companies with little analyst coverage tend to have depressed valuations relative to more widely followed companies with similar prospects. Publication of research reports and financial models greatly reduce the time and effort required for an investor to become familiar with a company. Due to the large amount of research required, a company that is under-followed will tend to suffer from a lack of interest from the investment community and hence a discounted multiple. We would expect analyst coverage to result in a more attractively valued stock price over time, and hence a more accretive equity offering.

 

Moreover, sell-side analysts have much stronger relationships with the investment community than do capital market groups at investment banks. Thus research analysts are instrumental in ensuring that secondary shares are appropriately valued and placed with the proper long-term investors.

 

Most importantly, we think Rural should share with investors their specific parameters for offering stock. We asked management what we believed to be a reasonable and topical question relating to this on Rural’s last conference call, and we did not receive an answer as shown below in the transcript from the February 6, 2006 earnings conference call:

 

Gabe Hoffman:

 

SURE, AND JUST-- THAT'S HELPFUL. AND JUST TO FOLLOW-UP, YOU'RE THINKING OF ACCRETION DILUTION ON A REPORTED BASIS OR ON A CASH EARNINGS BASIS, AND IF SO, YOU KNOW, OVER WHAT TIMEFRAME ARE YOU THINKING? ARE YOU THINKING A NEXT 12-MONTH TIMEFRAME IS HOW YOU GUYS APPROACH THE ACCRETION/DILUTION MATH?

 

Mike Zarriello:

 

AGAIN, YOU KNOW, WE JUST FILED THIS THING. WE ARE IN A QUIET PERIOD AND I REALLY CAN'T GET INTO THAT, YOU KNOW, UNTIL I THINK IT, WHEN IT WOULD BECOME EFFECTIVE, I THINK IT WOULDN'T BE PRUDENT TO REALLY GO DOWN THAT PATH RIGHT NOW.

 

We believe that uncertainty over the timing and price at which Rural will complete an equity offering is capping the stock price. If management were to share its parameters on calculating accretion, we think that the overhang would be removed, the stock price would recover, and the Company could issue stock at a higher and more accretive valaution.

 

 


 

 

There are numerous ways in which Rural management can state its parameters for an equity offering and alleviate investor concern without undermining the Company’s credibility or flexibility. We believe that any of the following statements would provide investors with a greater degree of clarity and significantly boost the Company’s share price:

 

 

1.

We believe that our current stock price is significantly undervalued.

 

 

2.

We will not offer equity unless it is accretive to next fiscal year’s cash earnings.

 

 

3.

Our current stock price is well below where we would consider selling equity.

 

Investor Communications: Rural is one of only a few publicly-traded companies that does not provide any financial guidance. Companies that do not give guidance trade at discounts to their peer group. Because investors are not as familiar with the industry outlook and business prospects as are senior management and the Board of Directors, investors will tend to use a higher discount rate for projected results, which translates into a lower stock price. We note that guidance is not an all-or-none situation. Management can provide guidance on various components of the Company’s financial model without necessarily providing spot guidance for EBITDA or earnings per share.

 

Importantly, providing guidance is a means by which investors can judge management. According to Rural’s most recent proxy statement, the Company’s executive compensation programs are based on the belief that the interests of executive officers should be directly aligned with those of shareholders. The Compensation Committee report listed a number of qualitative and quantitative measures used to determine cash compensation of senior management. It is not only important, but a matter of fairness, to provide a company’s owners with some degree of specific metrics and goals with which to evaluate management performance.

 

The frequent restatement of prior financial results, which occurs nearly every quarter, only exacerbates the lack of guidance. We understand that when Rural terminates or loses a contract, GAAP requires restatement of earnings. These regular restatements are complex and require a great degree of time and effort for investors to analyze. Further, Rural only provides the restatement for the prior year quarter. Given the seasonality in the business, it would be helpful for Rural to provide restated financials for the last four quarters so that investors can analyze a full year of results. Many companies file 8-K’s with unaudited pro forma results for the last twelve months after there has been a material change to financial results.

 

Because Rural is a small capitalization stock, the amount of dollars that can be invested in the Company’s shares is small relative to other opportunities. Yet, given the lack of financial guidance and continually restated results, the amount of work required to make an investment decision in Rural is not commensurate with the potential financial return.

 

These factors create obstacles for both investors and research analysts to suitably assess the Company’s prospects, and have resulted in a substantially undervalued share price, in our view.

 

We appreciate the time Jack Brucker, Michael Zarriello, and Liz Merritt have spent to help us better understand the Company. We intend to remain one of Rural Metro’s significant shareholders for the long term, and as such we wish to engage management and the Board of Directors in a constructive dialogue to more fully discuss the contents of our letter.

 

Sincerely,

 

 

/s/ Gabe Hoffman

Gabe Hoffman

General Partner