Description

Investment Thesis:

Pendrell (PCO) offers SPAC-like optionality while trading at a discount to cash. Trading on the Pink Sheets, PCO is an illiquid cash shell trading at a -$22.8mm EV with 14.1% upside to cash. Additionally, after discussions with patent experts, we believe PCO’s patents are conservatively worth $25mm. A simple DCF on PCO’s NOLs after a potential acquisition leads us to a present value of ~$50mm. With a rough NAV of $260mm, PCO offers 62% upside with very limited downside, an incentivized management team, and a board with extensive telco history.

How does management intend to use its cash pile?

Management’s stated goal is to use the cash to buy an operating company. We believe this is the best use of cash and will maximize value.  We modeled a hypothetical transaction using conservative assumptions (8x EBITDA, 50% leverage, 3% EBITDA growth, 15% cost of capital, and a 21% tax rate) and derived a NPV for the tax savings over the life of PCO’s NOLs of ~$50mm.

We believe a transaction is likely to happen soon given the rationale for PCO going private was to appease potential targets who had no interest in being public. However, this thesis is not contingent on an immediate transaction as PCO still trades at a discount to cash, and management is keen on repurchasing stock so long as PCO’s discount to cash persists. The company repurchased 30,478 shares for an average price of 645/sh, a 3% discount to the current share price. Furthermore, G&A burn has been significantly cut by management to $7.5mm, so PCO will not bleed NAV as investors await a transaction.

Many investors forget SPACs trade at a massive premium to NAV with the same use of proceeds. A generic SPAC post-issuance will trade at ~$10/sh while NAV/sh is only ~$7.60/sh (a premium of 32%!) when one accounts for ECM fees and the sponsor promote.

Management and Board

We believe Craig McCaw and management are excellent stewards of our capital. McCaw, the current Executive Chairman, holds an economic interest of 37.4% and voting interest of 67.6% through Eagle River. He has had a storied career in managing and investing in telco companies. McCaw served as Chairman and CEO of McCaw Cellular Communications from 1974 until he sold it to AT&T in 1994. With his AT&T proceeds, he invested $1.1B in Nextel which he eventually sold to Sprint. Following his involvement in Sprint, he founded Clearwire Corp which he took public and eventually sold to Sprint. We are confident in McCaw’s ability to execute an accretive transaction for PCO.

Lee Mikles, the current CEO, pays himself a nominal cash salary and is instead compensated almost entirely in stock. In 2017, Mikles was paid $7,500 in cash and received a RSU grant of $626,000; he currently has $1.15mm of stock waiting to vest.

For more on PCO’s history, please see rhianik’s write-up from March 2012.

There isn’t enough liquidity for institutional investors; however, investors looking for an attractive opportunity in their PA should look seriously at PCO.

Catalyst

Management buys an operating company in 2018 and begins to monetize NOLs