Hedge fund calls for Webster Bank spinoff

A hedge fund with a significant stake in Webster Bank has sent a letter to the bank's parent company suggesting it spin off its health care savings account business to boost the company's share price.

The letter was sent to Waterbury-based Webster Financial Corp. by New York City hedge fund Kerrisdale Capital, which holds approximately 2 million shares in Webster Financial Corp.. Kerrisdale believes the company is undervalued by approximately $1 billion and should spin off its HSA Bank unit. Kerrisdale believes the business unit, if spun off, would be worth $2 billion on its own, based on a comparison to a similar independent health care savings account business.

"Given HSA Bank's already distinct customer base, business model, headquarters, and technology platform, we believe a spinoff is the most natural approach," the letter, signed by Sahm Adrangi, Kerrisdale's chief investment officer, and Jordan Giancoli, the fund's director of research, said. The letter is accessible on Kerrisdale Capital's website.

Health care savings accounts allow employees to deposit pretax income to pay for medical expenses not covered by health insurance.

"Webster has diligently nurtured HSA Bank for years; now it is strong enough to stand on its own," the hedge fund executives wrote. "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."

Webster, however, responded in an SEC filing disclosing the letter that it has no plans to spin off the health care savings account unit.

"Regarding the shareholder's suggestion that the board consider strategic options including a spin-off, we have considered multiple structures for HSA Bank over the years and have consistently found that it is best situated inside Webster," the disclosure, filed on Monday, said. "This is because, in our opinion, the economic benefit of these low-cost, long duration deposits greatly exceeds potential revenue derived from brokering deposits to other banks, though our flexible model allows us to do so if we choose. This compelling financial advantage and other competitive benefits derived from being a bank, including end-to-end relationships with our clients and cross-sell opportunities with our customers, are available only if HSA Bank remains under Webster's control."