|Shares Out. (in M):||12||P/E||0.0x||0.0x|
|Market Cap (in $M):||58||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-14||EBIT||0||0|
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Straight Path Communications Inc. (NYSE MKT: STRP) is a severely mispriced new spin-off from IDT Corporation which has limited downside and asymmetric upside opportunity. STRP’s unique and highly strategic assets include (i) 100% ownership of the largest U.S. portfolio of FCC licenses for 39 GHz wireless spectrum (615 39 GHz licenses) covering >90% of the country and ideally suited for meeting the fast-growing demand for wireless backhaul capacity and (ii) 84.5% ownership of a comprehensive portfolio of fundamental patents relating to point-to-point Internet and Voice over Internet Protocol (“VoIP”) communications whose validity has survived extensive re-examination in its past litigation and licensing with Skype/eBay (now Microsoft) and others. As the valuation scenarios below illustrate, I believe STRP shares are worth, at a bare minimum, nearly 2x their current market value on an orderly liquidation value basis and quite possibly will prove to be worth 5x+ their current market value as licensing arrangements are secured against de minimis incremental cost, creating a highly asymmetric risk/reward opportunity. Further, I believe that STRP’s TEV is likely fully covered if not exceeded by the value of only 5-15 of its “best” 39 GHz spectrum licenses, providing a strong margin of safety.
Why the Opportunity Exists
1) Classic Spin-off Dynamics. STRP is a tiny ($44mm EV), somewhat esoteric spin-off to which virtually nobody is paying attention and where traditional spin-off dynamics have resulted in an artificially, and I believe only temporarily, depressed share price. To compound this point, it is a spin-off from IDT, a company that itself is widely misunderstood with a highly entrepreneurial CEO and controlling shareholder Howard Jonas, who receives little respect from the investment community despite creating and unlocking tremendous shareholder value in recent years through organic growth, three (3) spin-offs, and regular and special dividends. There is little doubt that the vast majority of IDT investors (including us until we dove into the spin-off in the last few weeks) severely underestimate the quality and value of STRP’s assets.
2) CEO Nepotism. STRP’s CEO is Davidi Jonas, the 26-year old son of IDT CEO Howard Jonas and whose primary “experience” is as a rabbi. Most investors clearly think this is absurd. Personally, I think it is brilliant, as Howard is clearly the one pulling all the strings behind the scenes, and both Jonases are squarely aligned to maximize value as the Jonas family owns >30% of STRP equity plus 10% of Straight Path IP Group (the entity holding the patents).
3) Strong Emerging Demand for Small Cell Wireless Backhaul. STRP’s spectrum is wildly mispriced because the investment community does not realize that when the spectrum was last listed for sale (2010), small cell wireless backhaul was something of which nobody had ever heard (today, it is still not a well-known technology). At the time, IDT rejected an informal offer of $30mm for the spectrum (see p. 5 here). With small cell wireless backhaul about to take hold in a big way and expected to grow to 3.5mm outdoor small cells by 2015, STRP's nationwide 39 GHz spectrum is ideally positioned (STRP owns roughly 1/3 of the nation's 39 GHz coverage) and I believe almost certain to be extremely valuable (see new Spectrum presentation here). AT&T, Sprint, Verizon, T-Mobile & others are in testing for small cells, and reportedly found that "small cells bring nearly perfect coverage to problem areas" and demand is set to grow at an extremely high rate (read here and here). In the latter article, AT&T's head of small cell says “The beauty of a lot of the small cell-type of technology is we are building out this core infrastructure within our network that gives us flexibility to target a variety of use cases." As an added scarcity bonus for STRP holders, FiberTower's 39 GHz spectrum is effectively taken out of supply as of May, and likely to be unusable by anyone due to the bankruptcy court enjoining the FCC from transferring licenses - read the 2nd to last paragraph here.
4) Unappreciated Intellectual Property. Few, if any, investors have taken time to read and understand the extent of the STRP’s Internet communication and VoIP patents. Management believes, and it seems logical from my research, that STRP has potentially among the most fundamental of IP in the Internet communication industry (point-to-point communication links), which is evident in settlements reached with Skype/eBay and several others. The Complaint filed several days ago with the ITC can be found here, and p. 18 (p. 26 of the .pdf file) gives a detailed "non-technical" description of the patents. In the ITC complaint, STRP asked the ITC to halt the importation and sale of the manufacturers’ infringing products in the U.S. Examples of infringing products include smartphone handsets, tablet computers, eReaders, smart TVs, gaming consoles, Blu-ray players, and set-top boxes. It appears from the ITC complaint that STRP is emphasizing the fact that Skype/Microsoft has licensed and extensively implemented STRP’s IP, and that the technology plays a major role in their company now (Xbox One, Skype, etc.). While timing and net proceeds to STRP are uncertain, I value the IP very conservatively yet believe there is good home run potential, even after contingent legal fees. By requesting a portion of his 2012 compensation in heavily discounted stock of IPCI, the former entity holding the patents, Howard Jonas has reminded investors who are paying attention of 2008, when he voluntarily took his compensation in IDT stock rather than cash, just prior to a 30-fold increase in value in roughly two years.
5) Minimal Cash Burn. Based on conversations with management, I conservatively estimate $1.5mm per annum of initial cash burn, before any licensing occurs. STRP has four (4) employees, a bit of revenue from initial spectrum trials (Covad, AT&T, Verizon). Patent litigation enforcement is being led by Kirkland & Ellis and Mintz Levin, with Hunton & Williams as local counsel, and all legal fees are on a contingency basis with law firms covering litigation costs.
Intellectual Property Group (click for link)
Notes to the valuation scenarios presented below:
While STRP is a somewhat non-traditional investment, I expect that these numbers end up being very conservative as small cell moves forward and the investment community begins to understand and appreciate the value of STRP’s unique assets.
I believe downside is quite limited and would prove temporary, while upside is asymmetric in a way we rarely see, with potential returns equaling multiples of our initial investment. Finally, given Jonas’ bullishness on Straight Path, I would not rule out his tendering for the ~70% of STRP he does not already own in an effort to take STRP private. He could easily close such a transaction in a cash deal with no outside financing, although this would clearly not be a value maximizing outcome.
Disclaimer: The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. No representation or warranty is expressed or implied as to the accuracy of the data or opinions contained herein.
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