There IS somebody out therePosted: August 1, 2013
As it is the case for all postings in this blog, my standard disclaimers apply for this posting. However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice. Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
In a 2010 TED speech, Astronomer Ms. Jill Tarter, the Director of the Center for SETI Research at the SETI Institute said:
“In 2009, when TED awarded me its TED prize and the opportunity to make a wish to change the world – -a wish they would help me fulfil l — I thought of a mirror. It is the mirror that we hold up to the planet in our scientific search for the answer to the ancient question, ‘Are we alone?’ It is the mirror in which all humans can see themselves as the same, when compared to the extraterrestrial other. It’s the mirror that allows us to alter our daily perspectives and see ourselves in a more cosmic setting. It is the mirror that reminds us of our common origins in stardust.
TED and technology are helping me and my team hold up that mirror to all inhabitants of this planet so that we can see our reflection as Earthlings. I told TED that “I wish that you would empower Earthlings everywhere to become active participants in the ultimate search for cosmic company.”
Ms. Tarter’s quest for alien life and quest for bringing a deeper understanding to her fellow humanoids resonate with me as I am on a quest for increasing my fellow investors’ understanding of the tremendous investment opportunity inherent in Unitek Global Services and its equity UNTK, something that I have written about at length (go here for a baseline discussion and a detailed description of the crisis that turned the company’s equity into the biggest bargain on the planet and the steps that Unitek Global Services has to go through in order to restore its equity value and for investors to hit the Big Kahuna.)
Only recently, with clear signs that the company is indeed taking all the right steps, have I begun to see signs that I am not alone.
Two institutional investors, Red Oak Partners and John Randall Waterfield, joined the fray earlier in the year and this week someone else bought a quarter of a million shares, surging the per share price and giving a clear taste of what is to come once the market catches on to the opportunity.
Today, I stumbled upon another sign of, if you will, extra-terrestrial life, in the form of a blog entry about Unitek Global Services by Red, a prolific investment-focused blogger who is worthy of mention because his analysis is refreshingly substantial in scope and because he apparently backs his analysis up with investment of capital.
The posting on the red corner blog concludes, of course, that UNTK is a bargain — a finding that is not particularly interesting, since we all knew this to be true (well, at least I did!), but nevertheless is a good read because the blogger puts the incredible situation in a comedic light. Here are some excerpts of his lengthy posting:
… in taking on a substantial amount of debt to fund its acquisitions, Unitek was inviting a near-fatal accident. And, when it acquired Pinnacle Wireless in 2011, that invitation was accepted: a year and a half later, an investigation by the Board’s audit committee discovered fraudulent revenue recognition practices at Pinnacle; the CFO, Controller, and division president were terminated; and the company was unable to file its 10-K and, later, its 10-Q’s, on time. It received a notice of suspension from Nasdaq, of course, but more important for our purposes, its inability to file financial statements triggered a default under the terms of its borrowings.
At this point, its lenders could have taken it to Ch. 11, wiped out the equity and brought it back under their ownership. (Between December and April, the share price fell by a quarter and holders of the common fingered their worry beads; between April and June, the market cap was cut in half as even the devout fled).
That the lenders (and Cerberus, especially) did not do so ironically reflects the value of the business. (I think we can all agree that a business that generates $25 million of free cash flows to equity is worth more than $30 or $60 or even $90 million). In a Ch. 11 process, transaction prices would have been high, the administrative fees as extravagant as usual, and the implied returns to the acquirer therefore low. And besides, DirecTV had served Unitek with a 180 day notice of termination which meant that time was tight.
The lenders’ alternative option – one that promised higher returns – was to add penalties (warrants for 20% of the equity, please!) and higher interest charges on the debt. And that, in the end, was the outcome.
In the posting (here,) Red goes on to compute out Unitek’s future until 2016 using “highly conservative growth and margin assumptions” (you can find the financials here) and with reference to the company’s current silly market capitalization concludes that:
Apply a conservative multiple to 2016 earnings, discount back to the present, subtract the inevitable cash costs related to the forensic audit, the refinancing, and any litigation costs that may arise from the alleged fraud at Pinnacle Wireless, and Unitek’s value is likely two, three or four times its current market cap, even with the 20% dilution.
I was glad (and amused) to read this and I am pleased to welcome Red to the world of Unitek Global Services, a place where things do not make sense — as of yet! Welcome to the party, Red.
There is somebody out there!
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