Description

Thesis

We posted this idea back in 2018 when the company was named New Ulm. It was shortly after the ACAM program was enacted and rural telecom companies that applied were granted meaningful annual cash payments in order to increase penetration to the houses in their market areas. At the time this meant, for many companies, we had visibility into large percentages of their ebitda streams for a ten year period. The government was essentially subsidizing their capex and, unwittingly, increasing the value of these companies as they became fiber-rich (some) data providers rather than the traditional landline companies that they had been traditionally. This large tailwind has catalyzed industry consolidation and there are numerous infrastructure funds that are either looking for platform companies or have already acquired such. We believe the decision facing Nuverra is one facing the group writ large: borrow funds to become a true fiber play, get a robust multiple, and sell or sell now and let the acquirer spend the money-the proverbial bird in the hand so to speak.

A further note about our approach to value investing is in order. We are drawn to names that are optically cheap-where we don't have to squint to see the value. We have found that by employing a valuation-sensitive methodology we do a good job of attenuating the downside. The upside is then a matter of time and amplitude, obviously. We are willing to endure IRR risk as is evidenced by some of the names we have posted on the site (and that we still own).  It is our belief that Nuverra is worth closer to $40 than $20 based on an 8x and valuing their other investments at their balance sheet carrying values. And we think that might be conservative based on comp transactions and discussions with bankers. There are no guarantees in life but we believe that the management team and board realize how undervalued their stock is and are committed to closing the price/value gap. While the pace of their initiatives, or lack thereof, might be frustrating to some holders-we think it's only a matter of time before they do something.

Company Description (from most recent 10k)

Our principal line of business is the operation of seven communications companies. Our original business was founded in 1905 and consisted of the operation of a single communications company (New Ulm Rural Telephone Company). In 1984, we changed our name to New Ulm Telecom, Inc. In 1986, we acquired our second communications company, Western Telephone Company (WTC). In 1993, we acquired our third communications company, Peoples Telephone Company (PTC). In 2008, we acquired our fourth communications company, Hutchinson Telephone Company (HTC). In 2012, we acquired our sixth communications company, Sleepy Eye Telephone Company (SETC). In 2018, we acquired our seventh communications company, Scott-Rice Telephone Co. (Scott-Rice). Our businesses consist of connecting customers to our state-of-the-art, fiber-rich communications network, providing managed services, switched service and dedicated private lines, connecting customers to long distance service providers and providing many other services associated with our businesses. Our businesses also provide Internet protocol television (IPTV), cable television services (CATV), Internet access services, including high-speed broadband access, and long distance service.

Valuation

s/o: 5.2

Market cap: 112

Net debt: 43

TTM EBITDA: 26.5

EV/ TTM EBITDA: 5.7

Financials

Holders

Also note that Magnolia Capital recently filed a 13G in the name. Magnolia is run by Adam Peterson, the CO-CEO of Boston Omaha (BOMN). That company has an interest in rural telecom and acquired Utah Broadband in 2020.

Geography

As mentioned in our prior post, the acquisition of Scott Rice gained them entry into the attractive Twin Cities Metro area. Iowa and Minnesota are well represented on the list of ACAM recipients: https://apps.fcc.gov/edocs_public/attachmatch/DOC-343180A1.pdf and we believe that Nuverra would make an attractive platform company for a financial buyer interested in the upper midwest. One of the concerns people had was about the duration of the ACAM payments--in essence, what would happen after the ten years elapsed. Our industry contacts almost universally agree that there will continue to be government incentive payments for many years after the ten year anniversary. The issue of rural broadband connectivity is largely nonpartisan and Covid only served to highlight the gulf between areas of the company that could work/school from home without incident and those where the lack of infrastructure was an impediment.

Board of Directors

There are two members of the board with deep industry experience: Dennis Miller and Wesley Schultz. Dennis was the CEO of Midwest Wireless and Wesley Schultz was the CFO of Rural Cellular----both companies were ultimately acquired, to Alltel and Verizon Wireless respectively. This gives us some comfort that they understand how important scale is in this business and that they have a good sense of industry valuations.

Conclusion

Nuverra trades at an undemanding multiple, in a predictable business, with funding tailwinds for the foreseeable future. Recent industry transactions have traded north of 8x (well above that for pure fiber plays. Management is aware of the under-valuation and I believe, in time, will take actions to remedy the situation-there are really two paths from here. 1. Borrow funds and continue building out a fiber network such that the stock is awarded a higher multiple 2. Higher a banker and sell the company. The board has the necessary experience to help management make an informed decision about which path makes the most sense for shareholders.

Catalyst

• company borrows to invest heavily in their fiber footprint......hence increasing the value of the company
• company is acquired