|Shares Out. (in M):||164||P/E||nm||nm|
|Market Cap (in $M):||87||P/FCF||nm||nm|
|Net Debt (in $M):||-92||EBIT||-4||10|
A huge activist opportunity
Retelit is one of the leading Italian providers of wholesale data services and infrastructure for the telecommunications market. Retelit’s clients include for instance AT&T, Verizon, BT, Orange and others. Services currently consist of broadband connectivity mainly and they are being provided through its proprietary fibre optic network of >7600 km and 18 data centers. Retelit is one of only a few that possesses the infrastructure in Italy to host B2B services, a segment in Italy that is a cash maching, and is dominated by Telecom Italia.
So why is Retelit not minting cash? In a complicated series of events, an illegal slate of directors with numerous conflicts of interests was elected by a group of minority shareholders with whom they work outside of Retelit. A sort of quid-pro-quo. There is no CEO nor CFO. The board spends €10mm MINIMUM in excess costs (you fill find the break-down below) and shows up to work on a bi-weekly basis at best. President Gabriele Pinosa has no technical background and is an Opus Dei fanatic, using Retelit cash flows and balances to distrubute to "friends and family".
First, Lets discuss the downside:
Retelit shares trade for €0,53, yielding a market cap of €88,3 mm, with net cash and assets that can be broken down as follows:
€19.4mm in net cash
€22.5mm in net cash to come (the sale of the WiMax business to Leucadia and Ramius will bring this cash iver the next 18 months
€68mm net utilizable tax losses without expiry (offers have been received for €53-55mm)
Market Cap: €88,3 mm
Net Cash on B/S: (€19.4mm)
Discounted Cash Incoming: (€20mm) (conservative)
Sale of Tax Credit: (€53) mm
Enterprise Value: (€4mm)
Given that the company has no management, and the board uses the company's cash for its own purposes, it is a miracle the situation isn't worse (and why a proxy fight now is essential). With a free float of 65%, there is ample room to get the right people involved.
- New board will be remunerated in out of the money stock options, period.
- 4mm of useless/inefficient capex will be cut
- Only 4 data centers out of 15 are needed yielding a savings of €1.8-€2.0mm
- Personnel dealing with board member needs outside of retelit totalling €500,000 will be eliminated without restructuring cost
- €600,000 of consultancy expenses from Opus Dei "friends" will be eliminated
- miscelaneous needless costs of €1.5 mm including €1mm of board cash compensation to be eliminated
€8.5 recurring free cash flow WITHOUT CUSTOMERS!
4,000 Medium sized corporations exist and are perfectly suited to be Retelit B2B Fixed Line customers (churn 0.4% per annum in Italy).
For every €1 of incremental revenue, €0,86 falls to the bottom line.
- The Italian market for b2b fixed line direct is roughly a €2 bn per annum and growing slightly.
- The wholesale market (meaning companies that borrow the fiber from Telecom Italia and resell it at a lesser price) is roughly €3.2 billion and relatively stable. These companies however are very unprofitable, as the rental cost of TI fiber is inordinate, and the transfer of customers to Retelit, with a sales force that actually works as opposed to today's, should have no difficultly delivering a faster service at a lower cost to the many corporates to which Retelit's fiber is already connected.
- With 10% market share in Italy, from less than 1% today, Retelit would generate €457mm of free cash flow. Management will be paid according to market share in euros (to discourage heavy undercutting) and cash flow generation (clearly something less than 10%, even if it is my view that the figure is eminently achievable, would yield explosive upside)
- If the support of investors exists to absorb the free float and endorse change, I am confident that the upside will be enormous.
- Lastly, while I cannot disclose names, I have assembled a management team and a board that are entirely aligned and believe using free cash flow to repurchase 25% of the market capitalization (depending on price, of course), day one, is the first step.
Now I leave questions to interested readers and will use the q+a section to drill deeply into any concerns or questions interested investors may have.
Thank you in advance.