Thursday, December 5, 2013

CIBL, a discounted pile of cash with high optionality

An oft-written about investment on this blog, CIBL (ticker CIBY) has finally come full circle.  What started as a complicated mess of wireless partnerships and TV stations has finally been unwound into a pile of cash and two new investments.

If you have the time I'd recommend reading the full series on CIBL, part 1, part 2, part 3.

For the rest of you I'll provide a quick recap.  CIBL was spun off from telecommunications company LICT in 2008.  CIBL as originally spun off was simply a collection of ownership interests in various joint ventures: two wireless towers in New Mexico, and interests in two TV stations in Iowa.  In my initial post I speculated that the company could be worth between $1249 and $3314 if they were to sell out of their ownership interests.

The company had stated in their financial reports that they had received an offer to buy their wireless ownership interests for a value that was materially higher than the current share price.  Even with a clear message from management regarding their undervaluation the market didn't seem to care.  The Board, which includes Mario Gabelli, a famed value investor with a 27% ownership stake seems very shareholder focused, both on realizing value, and undertaking shareholder friendly actions.

Fast forward close to two years later, CIBL has followed through and sold out of their wireless towers and TV station ownership interests for a value that is slightly higher than my low end estimate.  It's fascinating to read over my previous posts, and especially the comments with the lens of knowing how things worked out.  My estimate of value for the TV stations was low, my highest estimate of value was $13.8m, and they sold the stations for $14.5m.  On the other hand my wireless tower valuation was too aggressive, the final sale was for $31m, whereas I estimated they could be worth anywhere between $25m and $68m.

Amazingly even with management's value unlocking actions CIBL still looks cheap.  Here is a breakdown of their current assets:

The company has a large amount of cash from the sell off of their wireless towers, as well as from distributions from past operations.  They also have $352 per share receivable net of taxes from the sale of their TV stations.  Once the sale closes, which could be a while due to regulatory issues, the company will have close to $1400 per share in cash.

Along with their cash the company holds two other investments, a 1.26% stake in Solix, and a 51% ownership interest in ICTC, a rural telecom company.

The company's Solix stake is non-traded, but Dave Waters found they did $91m in revenue in 2012 when he wrote about CIBL, I am valuing the stake at 1x of sales.

When evaluating the latest price against the sum of the parts detailed about CIBL is about 20% undervalued.  The stock would need to rise about 25% to trade at the value of its assets, which would be a nice appreciation for shareholders, but nothing to write home about.

There are two factors that I believe make CIBL more attractive than the numbers initially suggest, potential hidden value at CIBL, and Gabelli's capital allocation skills.

As mentioned above Mario Gabelli owns 27% of the company and serves as a Director.  Gabelli is a well known value investor who runs GAMCO Investors a $30b asset management firm that runs a number of highly rated mutual funds.  While the CIBL stake is nothing more than a speck to his overall fortune he does seem to be actively involved in pushing for value creation.  The real kicker for CIBL is that Gabelli and his associates will have a pile of cash to invest.  Given how well they've done in the past I don't mind letting them invest some of this cash for me.

The second factor is potential hidden value at ICTC itself.  CIBL has worked over the past year to increase their stake in ICTC at $22 a share to a 50% ownership stake.  When I initially looked at the ICTC financial statements I couldn't understand why CIBL was interested in buying shares.  After thoughtfully reconsidering the statements I began to see shades of hidden value, much like CIBL looked like when I initially researched them.

ICTC is a holding company for a rural telecom company as well as a CLEC and a few other assorted investments.  The company is selling for slightly more than stated book value and a reasonable earnings multiple of 12.6.

Gabelli & Co did well unwinding the complicated ownership interests and joint ventures of CIBL and turning them into cash.  My suspicion is that they're intending to do the same thing with ICTC.

ICTC has a few sources of value, the first is the telecommunications operating company.  The company has 3200 customers that are generating $1274 in revenue per customer.  This is compared to Frontier Communications who's customers are generating $1385 in revenue per customer.  I will take ICTC's market value as their fair value; let's assume the telecommunications company is worth $8.2m or 12x earnings.  Then the company has $2.9m in cash, and a slightly smaller amount of debt.  There are two ways to look at this cash and debt.  The first is that it might travel with the telecom company in an acquisition.  The debt might be attached to communications facilities or equipment, and since it's easily serviceable it wouldn't need to be paid off.  The second way is to net the cash and debt effectively canceling them out, I think this is probably appropriate.

ICTC has three investment holdings, an ownership stake in a North Dakota telecommunications carrier, a few miscellaneous investments and a partnership interest in a rural wireless tower.  Their investments are starting to sound like CIBL's investments.  ICTC carries their tower interests for $144k, which is understated considering it paid them over $250k in distributions last year.  If the company were to sell the wireless tower interest at a similar multiple that CIBL received for their New Mexico towers it's presume that they might receive $1.7m for their interest.  My guess is that their North Dakota ownership interest is similarly undervalued, although without more details it's impossible to know by how much.  If ICTC were to unwind in a piecemeal fashion I don't think it's a stretch to think they might be able to realize another $150 p/s in value for CIBL bringing CIBL's total asset value to about $1800.

Overall CIBL isn't a slam dunk investment, but it's the type of asymmetric investment I like, buying safety at a discount with the possibility of an upside surprise.  What makes the upside even more attractive is that the company has a history of profitably unwinding complicated investments, and a savvy investor is helping to take part in the process.

Disclosure: Long CIBL

10 comments:

  1. What are your thoughts on LICT? It still own a bunch of cable, seems cheap In its own right, has the same gabelli involvement, and is larger and more diversified.
    Disclosure: long LICT

    ReplyDelete
  2. Brian,

    I agree, I looked at it earlier this week briefly, saw the discount to book and the low earnings multiple. I think the endgame for them might be different than CIBL, what it owns is much higher quality than what CIBL owned, and I can see the company continuing to run their operations for years.

    When I first looked at them a few years back I was worried about a revenue decline, it looks like things have stabilized.

    Nate

    ReplyDelete
  3. I have enjoyed this series and as you have said, it has been interesting looking back on the posts knowing how this has play out. I have a question about the shares though...both Interactive brokers and Ameritrade will not allow orders to open positions in CIBY, thoughts?

    ReplyDelete
  4. Tender offer announced this morning. Range of 1,300-1,350. Seems like its a positive for the holders that dont tender.

    ReplyDelete
    Replies
    1. Who WOULD tender, seeing as the price is at $1,382 now? Maybe bigger shareholders who have problems getting out of this illiquid stock? That's all I can think of that would make sense: someone with too many shares to move in the open market. And someone who doesn't recognize the value of what they own. Seems likely to be under-subscribed.

      Delete
    2. The tender doesn't make much sense. The last time the company offered a tender it was less than half subscribed. The stock is illiquid because no one wants to sell, not company management, or current shareholders.

      I have a feeling if a larger shareholder wanted liquidity all they'd have to do is post their shares for sale and they'd be picked up quickly.

      Delete
  5. Is the ICTC ownership stake correct? In the financials page 6, the voting rights + ownership is 51.3% but the non-controlling interests are 60.05%. I wanted to double check as maybe I am missing something with my newness to the name.

    http://www.otcmarkets.com/financialReportViewer?symbol=CIBY&id=110998

    ReplyDelete
  6. Nate,
    Thanks as usual! Bought shares a couple weeks ago and agree with your reasoning...pretty safe situation. Will be curious to see what they do with the cash. Not to say this will continue, but watching this unfold has been interesting, it seems all the surprises have been positive.

    Brian,
    I also bought LICT. Still doing analysis, but got comfortable enough to start a position. Interesting that Gabelli explicitly states he thinks the stock is undervalued in the shareholder letters, and has been backing it up by maxing out repurchases (and getting the debt covenants raised to buy more). Also looks very cheap relative to comparable companies, but one thing that worries me is whether it's not the comparables that are overvalued (e.g., FTR looks extremely speculative to me).

    Will

    ReplyDelete
  7. Nate - sorry unrelated post, but what are your thoughts on Deswell Industries (DSWL)? Classic example of a very frustrating net-net!

    ReplyDelete
  8. Well I was wrong about the tender offer being under-subscribed:

    http://www.prnewswire.com/news-releases/cibl-announces-preliminary-results-of-its-modified-dutch-auction-tender-offer-239490251.html

    2,286 shares validly tendered and not withdrawn at $1,300/share = about $3,000,000, or 9% of the company bought back. At a 5.5% discount to most recent trade ($1,375).

    ReplyDelete