November 28, 2015 - 6:20pm EST by
2015 2016
Price: 25.63 EPS 0 0
Shares Out. (in M): 14 P/E 0 0
Market Cap (in $M): 370 P/FCF 0 0
Net Debt (in $M): -169 EBIT 0 0
TEV ($): 201 TEV/EBIT 0 0

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attractive risk / reward with an A+ management team that is also buying in the open market. I think the
stock has only $5-7.50 downside and over $60 of upside.
PDVW was founded by the founders of Nextel, which was sold to Sprint in 2005. In addition to the
founders, many of the other employees of PDVW used to work together at Nextel. While at Nextel, they
were able to successfully re-band 800Mhz spectrum to make it more valuable. Re-banding involves
relocating parties to different bands, which often requires new equipment to be purchased. Spectrum
becomes more valuable if it is contiguous. Nextel was arguably the best in the industry at creating value
in this way. It was done through the hard work of petitioning the FCC and working with affected parties
(ie, public safety, critical infrastructure and business/industrial users). An analogy could be made with
realestate development. One can just buy land with a view that it will appreciate or one can buy land
and then proactively work with local government, businesses, non-profits, etc. to try to make it more
valuable. For example, maybe you offer to pay for a nicer / bigger homeless shelter in another part of
town. The management team at PDVW has a history of excellence with the later when it comes to
creating spectrum value. This is act 2 with a similar playbook.
At its peak, Nextel had over 23 million subscribers. Many of these Nextel subscribers were attracted to
the company’s unique Push-To-Talk (PTT) service offering sold primarily to blue collar workers. The
offering allowed Nextel to have relatively higher ARPU’s and relatively lower churn when compared to
the overall wireless industry. Sprint prematurely deactivated Nextel’s IDEN network in 2013 despite
active usage, because the company saw greater long-term value from repurposing the Nextel spectrum
for LTE. At the time, Sprint was desperate to improve coverage and lower churn. This left a void in the
marketplace. According to a market research study commissioned by PDVW, there are approximately
26 million employees that operate in dispatch-centric verticals within the top 20 metropolitan areas in
the United States. Think of bus drivers, construction workers, theme park workers, cable service
installers, etc. Many of these workers that were fans of the PTT service have been forced to adopt other
types of solutions to communicate that have issues relative to low latency PTT.
The company raised $200m in a private placement in June 2014. They spent close to half of this money
to buy 6Mhz of nationwide narrowband non-contiguous spectrum from Sprint. Despite being relatively
cash constrained, Sprint chose to take $10m of consideration in PDVW stock. Motorola also invested
$10m into the company at the time. The rest of the cash raise from that initial private placement was
earmarked to build out a narrowband PTT service across the top 20 metro markets. The company is
guiding for $200m of sales and $100m of ebitda in 5 years from this service. Of the 26m potential users
of its service in the top 20 markets, PDVW is targeting industries that have 6.8m potential users.
Maintainance capex in year 5 is expected to be about $4m per year (about $200k per market). Given
that the service is just narrowband, they only need 10-12 towers per market (15 in NYC). The 5 year
plan implies a high single digit penetration of the potential users in their targeted industries at an ARPU
of about $30 per month. Motorola is the initial equipment partner and the company is leveraging
Motorola’s nationwide dealer and distribution network. We have talked to some of these dealers in the
markets that have already been launched and optimism for the service is high. This may not make sense
to most of us that just use our smartphones to communicate. The fact is that in many blue collar
industries, the attributes of a ruggedized device that is tailored to dispatch oriented communication is
attractive. These industries also are very still familiar with Nextel and attention is immediately attained
when channel partners as advertise the product as “from the founders of Nextel.” See this article from
the Houston Chronicle on how PDVW’s service is being used:
So far, the company has launched service in a handful of markets. While they are not yet giving out
metrics, management remains confident in its business plan. It has also confirmed that the capex and
operating costs per market are in line with what they had expected. They have also not received
pushback from dealers or customers on pricing.
Large spectrum re-tuning optionality
While our initial checks confirm that company should be able to build a profitable PTT business, the real
attractiveness of the stock comes from the optionality of management’s ability to create value from its
spectrum assets. Management is currently in the process of trying to re-tune spectrum so that it will
have 6Mhz of contiguous spectrum. This will allow the spectrum to be repurposed for broadband and
will make it much more valuable. Unlike the re-banding that was done at Nextel, retuning is generally
less complicated and less costly. It usually doesn’t involve the incumbents having to spend money on
new radios, for example.The FCC is currently very focused on increasing the amount of spectrum
available for broadband so their strategic direction is in line with PDVW’s vision for its spectrum.
However, as can be expected, the incumbent users of the spectrum have been resisting any potential
disruption to their businesses. Many of the incumbents are utility companies that currently use the
spectrum for smart metering. PDVW has proactively offered to pay for most of the cost of re-tuning,
which management believes to be relatively minor. At the end of the day, it is difficult to put a
probability on the outcome of success, but given management’s track record of creating value in this
way and their own purchases of the stock recently, I think it is probably greater than 50% that they will
be successful. If they are successful, the stock could be worth multiples of its current valuation just
based on the spectrum value based on recent comparable transactions for LTE spectrum. Please refer to
initiation reports from FBR or Cannacord Genuity for a more comprehensive list of relevant transactions,
but there does not seem to have been any comparable spectrum sold for less than 50c per MHz/Pop in
the last decade. Average prices in the most recent AWS auction in January 2015 were well over $2 per
MHz/POP. PDVW has 6Mhz across the country (population about 312m). $1 per MHz/POP would imply
that PDVW’s spectrum would be worth $1.87 billion (1*6*312) before taxes. Using what it paid for the
spectrum from Sprint ($100m) as its cost basis and a 35% tax rate, implies an after tax value of about
$1.25b or about $85 per share. Once successfully re-tuned, the company will have several options. It
may decide to sell the entire company. The acquirer could be another wireless operator that can use
the repurposed spectrum for LTE and may also have some other narrowband spectrum that can be used
for PTT service. PDVW may decide to sell the broadband spectrum and acquire other narrowband
spectrum for its PTT service or it may offer additional broadband services to its existing customer base
and for new potential markets. Based on my conversations with management and their prior history of
selling Nextel at an opportune time, the last option seems to be the least likely of the three.
It’s a fair question to ask why Sprint would sell spectrum at 6c per MHz/POP that could be worth up to
$2 per MHz/POP. First, Sprint needed cash. Second, Sprint was dealing with a lot of other issues with
the FCC at the time. They wanted to merge with T Mobile and are probably waiting for a change in
administration to try again. Third, by what Sprint did with Nextel’s Iden network, it was not in a good
position to go after PTT customers. Fourth, they couldn’t afford to build out to a speculative business
plan so had an asset that was not going to generate revenue for a long time. Fifth, repurposing
spectrum is hard work and is not Sprint’s core competency as it is for PDVW management. The fact that
Sprint took an equity stake in PDVW is worth highlighting again.
While re-tuning is the primary way value can be created, the company is also opportunistically buying
more narrowband spectrum. Other owners of narrowband spectrum have approached the company in
order to gain liquidity. These spectrum owners do not have the national scale and expertise necessary
to repurpose their spectrum on their own. While the company did not need additional funds for its
business plan, the company raised about $65m in May 2015 to opportunistically acquire additional
narrowband spectrum at valuations that are accretive on a per MHz /POP basis relative to the
company’s market valuation.
Risk / Reward
While there is a high level of uncertainty, there is not necessarily a high level of risk at the current
valuation relative to the potential multi-bagger upside if the company’s retuning efforts are successful.
In the downside case, lets assume that the company is unsuccessful in re-tuning its spectrum and that
the company only achieves $50m of ebitda in its PTT services in 5 years vs its guidance for $100m. This
would imply ebitda less capex of $46m. 10x this would imply a valuation for the PTT business of $460m.
Discounted back 5 years at a 14% discount rate yields a downside value for the PTT business of $240m.
Lets also assume that the company creates no value from the $65m recent equity raise and that the
cash burn for building out the PTT service over the next 5 years in 20 markets costs 20% more than the
$100m expected. This would imply a downside valuation of about $20 per share. Another way to think
about the downside is to take what the company paid for its spectrum - $100m and just add the current
assets ($170m, $169m of which is cash) less all liabilities ($10m ). This implies a downside value of $18
per share. At about the current price of $25.63 per share, there is about $5-7.50 of downside. Please
note that in the downside case, I assume that employee options (1.6m options at an average strike price
of $22.75) expire worthless. Retuning and repurposing for broadband would likely imply a valuation of
anywhere from a minimum of 50c to $2 per MHz / POP. This would imply upside range of $46.50 to
$160 per share.
Good shareholders to be alongside and high short interest
In addition to several insiders recently buying stock, it should be noted that Cerberus owns 25% of the
company. They initially bought in the private placement at $20 per share in June 2014, were the biggest
buyer in the follow on offering in May at $40 per share and bought more as the stock has drifted lower
in the last few months. I point this out because Cerberus has done well with investing in spectrum in the
past. They were large investors in Nextwave, for example. The company’s second biggest shareholder is
Owl Creek at 12% of shares outstanding. They have also been adding on weakness recently. As stated
earlier, Sprint and Motorola are also long term strategic holders of the stock.
It should also be noted that the short interest is at 27 days to cover. This is up dramatically since June
and has likely been a large part of the recent weakness in the stock. The other source of recent
weakness was likely the result of some early investors from the private placement selling after those
shares qualified for long term gains. Shorts are clearly betting that management will not be successful
with re-tuning and with its PTT narrowband service. While things are clearly uncertain, the uncertainty
cuts both ways. We have done checks into both market receptivity towards a PTT service and spectrum
repurposing. While it is difficult to have high conviction in positive outcomes at this stage, it is probably
much harder to have high conviction in negative outcomes. As stated earlier, given the high cash
balance and low price management paid for the spectrum from Sprint, it is difficult to get a lot of
downside to the stock at this point even if the bears are right. The PTT business is not very capital
intensive and the company is not rolling out a national PTT network day one. In fact, one current
limitation is that the service will only be able to be used in a specific metro area. I point this out to note
that management will likely not burn a lot of money with PTT before understanding market receptivity
and returns on investment.
At the end of the day, like any other early stage investment, it comes down to management, which I
remain very impressed by. It also comes down to my view that this stock has only $5-7 downside and
over $60 of upside.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



settlement with large incumbents

PTT service metrics disclosure in early markets.  

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