UNWIRED PLANET INC UPIP
May 19, 2016 - 10:03am EST by
shoobity
2016 2017
Price: 5.61 EPS 0 0
Shares Out. (in M): 9 P/E 0 0
Market Cap (in $M): 53 P/FCF 0 0
Net Debt (in $M): -38 EBIT 0 0
TEV ($): 15 TEV/EBIT 0 0

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  • Nano Cap
  • IP Troll

Description

 

Unwired Planet (UPIP) was written up by ci230 about 18 months ago (please note the stock did a 1 for 12 reverse split in January 2016). The nature of the business has changed completely through a recently announced transaction and therefore we believe warrants a new write-up and discussion.

 

Summary:

 

UPIP is a patent licensing business that is selling its IP and transforming into a NOL shell story with ample cash and proven capital allocators in control that we believe will quickly unlock the NOL value.

 

Post deal, UPIP will have roughly $39M of net cash against a MC of $56M. However, in order to invest here, you need to believe the following will occur:

  1. The sale of the patent business will close or a better offer will appear
  2.  The board will intelligently allocate the cash
  3. A fair amount of the NOLs will be utilized fast enough to earn a good return

 

 

Quick Background:

 

Specialk992’s write-up from December 2013 goes into much more detail but here are the highlights:

1.      The history of UPIP dates back to the dot.com days where it developed technology to enable the mobile internet on early digital cellphones. Through the process of missing the smartphone revolution, it ended up with ~200 patents related to mobile internet / protocols.

 

 

2.      In 2011 Starboard pushed for a transition to an IP licensing (read: patent troll) model which the company has been doing ever since (fairly unsuccessfully until the Ericsson patents).

 

 

3.      In 2013, the company purchased over 2,000 patents from Ericsson in return for a license to the UPIP portfolio and a revenue share in future licensing deals (or litigation wins).

 

 

4.      In August 2015, Mast Capital Management purchased a significant ownership position in the company (over 18%) from Starboard and purchased all of the debt of the company from Indaba Capital Management. By the beginning of November, Mast developed a strategic committee for monetizing the IP and restructured the board. The reason for monetizing the IP rather than continuing to fight with a much new and improved legal team they took from AAPL, was because the strategy of the defendants (which CEO Boris Teksler notes is a very legitimate strategy he used to use when he was at AAPL all the time, KODK was one of his victims) was to simply bleed them out with legal fees by prolonging the cases as much as possible. Teksler knew this would likely bankrupt the company and therefore needed to sell the patents.

 

 

5.      The new board additions included Jess Ravich who is the Chairman of ALJ Regional Holdings (ALJJ) which was another NOL shell company that went from ~$0.15 in 2010 to over $5 recently.

 

 

6.      Optis UP Holdings LLC agreed to purchase the IP business from UPIP for $40M in cash and taking $10M in net payables. $10M of the $40M is to be paid out 2 years after closing. The company retains 50% of the upside to a successful MSFT litigation and 100% of the downside (which most likely would be a reimbursement of all of MSFT’s legal fees). At the time of the transaction announcement, this downside was estimated at $4M. After legal fees and severance for the employees that will be leaving, this results in approximately $24M of upfront cash to UPIP.

 

 

 

As far as we can find, Optis is a holding company controlled by a very successful Plano, TX patent lawyer named Leslie Ware. Mr. Ware is backed by the PanOptis Group, but we haven’t been able to get any information about whether there are any more financial backers within this group besides himself.

Pages 24-31 of the most recently filed proxy do a good job of describing the course of events leading up to this transformational transaction. They are quite entertaining and worth the read for anyone so inclined. The main takeaways for our more efficient readers are that Optis actually offered to buy the IP for $75M a year ago and mgmt got greedy and countered with $100M, to which the original offer was rescinded. Subsequently there were a handful of buyers that looked at the IP and no one decided to make a legitimate bid for it, so they went back to Optis, who offered them $50M and then subsequently lowered it to $40M when all was said and done.

 

 

With that background let’s cover the three most important parts of the idea:

 

 

Sale of the IP Business:

 

These are the four possible outcomes (in order of most to least likely) we see for how the sale of the IP business could play out over the next few months:

 

·        Option 1  – Company closes transaction with Optis for agreed upon price

 

·        Option 2 – Different buyer comes in over the top for a higher price to purchase the IP

 

·        Option 3 – One or multiple defendants settle knowing they are going up against a more well capitalized buyer (we can’t confirm they are more well-capitalized) and the company reneges on deal with Optis

 

·        Option 4 – Deal falls through and we are left with the original IP business.

 

Options 1-3 are listed below. Option 4 would be the bear case. Under the new management team, the company has begun to win a few of their proceedings as they have refocused on specific areas within Europe. However, as noted above, the defendants would likely continue to try and draw out the proceedings to bankrupt the company.

 

Option 1 is the most likely with 2 less so and 3 much less so. We showed 2 and 3 just to point it out. We will focus on option 1.  To be conservative we included $8M cash burn for the period from Apr-Jul closing and did not include the additional $10M to be received in two years.

 

Option 1

   

Option 2

   

Option 3

 

Share Price

$5.66

 

Share Price

$5.66

 

Share Price

$5.66

Shares

9.4

 

Shares

9.4

 

Shares

9.4

MC

$53

 

MC

$53

 

MC

$53

Cash

-$56

 

Cash

-$56

 

Cash

-$56

Net Proceeds from Optis Deal

-$24

 

Cash from over the top offer

-$35

 

Cash from defendants

-$50

Cash burn Apr16-Jul16

$8

 

Cash burn Apr16-Jul16

$8

 

Cash burn Apr16-Jul16

$8

Debt

$33

 

Debt

$33

 

Debt

$33

EV

$15

 

EV

$4

 

EV

-$11

               

Net cash

$39

 

Net cash

$50

 

Net cash

$65

Net cash/share

$4.08

 

Net cash/share

$5.25

 

Net cash/share

$6.84

               

NOL Carryforwards

$1,690

 

NOL Carryforwards

$1,690

 

NOL Carryforwards

$1,690

EV/NOLs

0.88%

 

EV/NOLs

0.23%

 

EV/NOLs

-0.66%

 

Until an acquisition is completed, it’s tough to pin point what value you should really place on the NOL. The value is really based on how much of the NOL can be utilized and then present value that back to current day. If you believe management will appropriately allocate capital to maximize the use of the NOL and they will do it in a short enough amount of time to deliver a reasonable return, then you would believe it is worth substantially more than the $15M the market is currently pricing in.

 

 

 

 

Can We Trust the Allocators?

 

Given that we will most likely be left with over $70M gross and ~40M net cash, who allocates it is the most important thing. So who will be doing that? You can see the Board profiles here: http://www.unwiredplanet.com/board-of-directors

 

We will just highlight a few:

 

Peter Reed – Managing Director at Mast Capital Management. They run something like $1.3B, primarily credit focused, and he has been on the board of a number of these smaller companies. Prior to this he was an i-banker at Brown, Gibbons, & Company focusing on M&A. You rarely become a $1.3B fund (particularly if not a mutual fund nor working for one of the big boys) without having strong capital allocation skills.

 

Jess Ravich – As discussed above, he is currently in the later stages of executing the exact same type of strategy as head of ALJJ. ALJJ had less than $200M of NOLs and about $30M in net cash when it began this process. Before ALJJ, Ravich was an investment banker working at Houlihan Lokey, Jefferies and Drexel. We believe the value he has unlocked at ALJJ is evidence of his skills in capital allocation.

 

Steve Wilson – former Managing Partner of Tennenbaum Capital Partners. Also used to be a partner at Latham Watkins where he was global chair of the company’s M&A group.

 

We would expect Reed and Ravich to be leading the charge here. The good news about acquisitions when trying to unlock NOL value is that the way to unlock an NOL (namely, a PROFITABLE company, with more profits unlocking more value) acts as a guard rail against making dumb capital allocation decisions like we see in so many turnarounds trying to “acquire to grow”.

 

The company has disclosed that it has already evaluated a few deals and is primarily looking in the asset management space (we are guessing because Reed / Wilson / Ravich have a lot of experience in that space and the trading multiples are pretty cheap right now). It sounds to us like they want to purchase a publicly traded company so they can get the financial reporting team with it, and frankly the public multiples are not aggressive right now (mid-single digit multiples of EBIT).

 

As part of the capital allocation, we also expect the company to refinance their notes for lower rates in conjunction with an acquisition. As of 6/30/15 the interest on their debt can be paid in cash at a rate of 12.5% or in-kind at 12.875% (meaning it just accrues more debt at this rate). The company has thus far elected to pay in-kind, thus growing the debt balance. The notes can currently be called for 109.656% of par which decreases each year. With a profitable, highly cash generative company, there is likely no reason they should be paying these rates. 

 

We also get some comfort knowing that 100% of the debt is owned by a Mast subsidiary.  

 

Bottom line is the remaining company will be managed by an aligned controlling shareholder (Mast) who is a strong capital allocator, and has brought in someone (Ravich) with a proven track record of success in this area to assist in the acquisition process.

 

Can They Utilize Enough of the NOLs and Can They Do it Fast Enough?

 

The newly transformed UPIP should have over $70M in cash that it can use to go acquire another business as well as potentially tack on more debt if the price is right.

 

How big of an acquisition will they do? It is anyone’s guess but the more EBIT they can buy then obviously the more NOL value it unlocks. So if they do a small one, we would expect quick follow-on transactions to maximize their balance sheet. The company could potentially do a rights offering without triggering Section 382 limitations which would also allow them to raise more capital and make a larger acquisition, however we don’t know how large of a rights offering they could do so we won’t include that upside in our calculations.

 

Just to fantasize with us for a moment, if they did used all of their cash and maxed out leverage on the balance sheet to say 3x EBIT and used proceeds to make an acquisition at 5x EBIT (which they have mentioned they are seeing out there), we would own the business at a very cheap multiple of earnings. Every turn of EBIT adds more cash that they can use to buy and lever up again, further reducing the current multiple and utilizing more of the NOL.

 

 

Near-term Acquisition

 

2nd Acquisition 1 Yr After

 

Company Pro-forma for Optis Deal

Acquisition at 5x EBIT

Pro-forma for Acquisition and Leverage @ 3x Debt/EBIT

 

Pro-forma for Acquisition and Leverage @ 3x Debt/EBIT

Subsequent Acquisition @ 5x EBIT (1 Year Later)

Pro-forma for 2nd Acquisition and Leverage @ 3x Debt/EBIT

Price

5.66

 

5.66

 

5.66

 

5.66

Shares

9.4

 

9.4

 

9.4

 

12.3

MC

53.4

 

53.4

 

53.4

 

69.4

Cash

-71.9

71.9

0.0

 

-13.5

13.5

0.0

Debt

33.4

24.5

57.9

 

57.9

28.8

86.7

EV

14.9

96.4

111.3

 

97.8

42.3

156.1

               

EBIT

 

19.3

19.3

 

19.3

9.6

28.9

Interest @ 10%

   

5.79

 

5.79

 

8.67

After-tax Income

   

13.5

 

13.5

 

20.2

               

EPS

   

1.43

 

1.43

 

1.65

Pro-forma PE Multiple

   

4.0

 

4.0

 

3.4

               

% of NOL Utilized/Yr

   

0.80%

 

0.80%

 

1.20%

Debt/EBIT

   

3.0

     

3.0

 

 

 

Now 5x EBIT is a very cheap price to pay for one of these businesses, so that may not always be realistic but we wanted to paint the picture of what this could look like. In this scenario, the company is utilizing around 1% of the NOL in a given year while keeping the company 3x levered. As such, this likely means the company won’t be able to utilize all of the NOL, even in an optimal scenario, however it does demonstrate how large the NOL is the company has to work with. We expect the company may find ways to get creative here in order to maximize the PV of its usage.  

 

There are a number of these NOL shell companies out there that sit there for years and don’t do anything. Even ones with strong capital allocators in control (such as MYRX). So why do we believe UPIP will utilize the NOLs fast enough for us to make a good return on this stock? Well for one, they have already evaluated a few deals and had LOIs on a few companies. Nothing definitive yet, but this tells us they are already actively pursuing a target. Secondly, Jess Ravich wasted no time finding a deal at ALJJ and therefore we would expect this to be no different. He was named Executive Chairman and Senior Executive Officer on February 20, 2013, and announced his first deal on October 18, 2013, less than 8 months later. The combination of these two items with the general weakness over the last 12 months we have seen in publicly traded asset managers makes us believe they will act sooner rather than later.

 

The counter-argument would be that the company doesn’t have significant NOLs expiring until 2020, so why would they be in a rush to do something?

 

Year

NOLs Expiring

2017

7

2018

25

2019

50

2020

491

2021

187

After 2021

>900

 

Our response is that in order to unlock the most value, the company is going to need to do a series of transactions to add EBIT over time and needs to get this process going ASAP in order to maximize the amount of EBIT they can purchase. As demonstrated above, there is a tremendous amount of NOL available relative to the company’s balance sheet size, and therefore they need to maximize the turns of EBIT before the NOLs expire to unlock the most value.

 

 

In Summary

 

For ~$15M in enterprise value, we get to own $1.7B in NOLs with proven capital allocators that have substantial deal flow (most of the Board are former i-bankers) and should be able to find a suitable target within the next 6-12 months, if not sooner.

 

 

 

Disclaimer: This research report expresses our research opinions, which we have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author and his clients have a position in this stock and may add, reduce or sell out of the position completely without informing readers.

 
 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Deal closes/better deal emerges
  • Good acquisition to utilize the cash/NOLs

Risks:

  • Deal doesn't close, shareholder base turns again / continued cash burn
  • Bad acquisition wastes cash and NOLs
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