Retelit : A Grossly Undervalued and Appallingly Mismanaged Infrastructure Jewel
§Retelit S.p.A. (“the Company” or “Retelit”) is a Milan-based telecom infrastructure company with an impressive fiber network spanning the entire country. Other than Telecom Italia, no other Company has the ability to connect all industrial cities in Italy. It provides business-to-business (“B2B”) fixed line and services which exhibit no material churn.
§The Company boasts cash and cash equivalents of c. €100mm (€15mm cash, €17 in staggered asset payment installments from Leucadia and Ramius, and €70mm+ in cash shields with no expiry), while its market capitalization is only €97.0 mm.
§The Company is run by a board with no share ownership, and a desperate desire to entrench themselves, with what appears to be the objective of avoiding any subsequent board discovering wrong-doing. To-date, CONSOB has become extremely aggressive in its scrutiny of the Company’s behavior. Three (3) days ago the majority of the board resigned, which de facto means the entire board has collapsed.
§What did the board do to attract such scrutiny? Over the last few months, the board desperately sought any way to bring in a blocking shareholder on terms that could be described only as offensively illogical and dilutive to investors. Originally these funds had no target aim but to entrench management and dilute shareholders, but then an opportunity “too good to be true popped up”: the board decided to abandon running its core business, and to instead make a bet investing over €70mm (which it does not have) to be a 6% owner in a 17% consortium member-owned subsea cable connecting Europe with Africa, the Middle East and Asia (one of six, called “AAE-1”). Despite the boards’ efforts to extol the virtues of this investment, it was apparent to anyone with a brain that this would bring the company into bankruptcy. (attached please find an export report written on the merits and lack thereof with regard to Retelit and AAE-1).
§A quickly implementable cash-light turn-around plan has been studied in extreme detail and is eminently feasible.
§The asset is one that International Investors would value highlyonce it starts to demonstrate its capacity to attract and retain customers, converting revenues into cash an 85%+ rate.
§Working with an elite telecommunications consulting firm, Retelit’s network has been mapped in 3-dimensions. Customers, clustered by resellers, who are paying extortion like rental fees to Telecom Italia and are bleeding cash have been identified and a sample contacted (19). Of the 19, 12 are in the process of signing “contingent-upon slate victory contracts (in the new elections on Jan. 2)” at a 7.5%-15% discount to Telecom Italia’s rate, with a term of 5+5 years(renewal).
§In total, these 12 resellers alone would account €182mm in revenues, with little to no incremental cost. Today, Retelit is annualizing €33mm revenues. Assuming that these incremental revenues yield €170mm in annual cash flow, the company would earn cash EPS of €1.04 per annum. For Conservatism we have assumed half the re-sellers with whom we have spoken accept our materially less expensive but equally sufficient services. At a conservative 10x EPS (versus pure play dark fiber trading well above 20x EPS), the stock would yield 11x today’s trading value, on the first day new management took office.
Please see the attached strategy. The risk/reward is one I have not seen in a very long time, particularly now that management / BoD has exited.