Wednesday, December 19, 2018

Voltari Corp: Tiny NOL Shell, Icahn Taking it Private

Voltari Corp (VLTC) is a tiny nano-cap (~$5MM today) and not actionable for many people, but it was once a mobile internet advertising company that pivoted to a triple net lease real estate strategy in 2015 after a rights offering where Carl Icahn gained control of the company.  Why was Icahn interested in the company?  They had somehow managed to rack up almost $500MM in federal NOLs and several hundred million in state NOLs.  Entities controlled by Icahn own 52.7% of the common stock and 98% of the preferred stock.  That preferred stock accrues interest at 14% (13% prior to 1/1/18) and has been paid-in-kind since inception, today the redemption value has grown to over $65MM, essentially wiping out the common equity over the last 3+ years.  Additionally, an Icahn entity is the lender on a $23MM revolving note used to finance the company's triple-net acquisitions, which there have only been three: 1) JPM Chase branch in Long Branch, NJ; 2) a 7-Eleven store in Flanders, NY; 3) and a more sizable office building leased to McClatchy in Columbia, SC.

One could say he's been slowly squeezing the value out of the company for several years and on 12/7, he delivered the final blow to equity holders, offering to buy the remaining 47.3% of the company he doesn't own for $0.58 per share or for a total of about $2.5MM.  For that $2.5MM, he'll presumably gain sole access to the NOL and can start putting it to real use ( VLTC hasn't generated taxable income since Icahn gained control).  I'm far from a tax expert, but I'm guessing either his preferred stock or the passage of the 3 year look back is enabling this move without busting the NOL.

He has a history of doing this sort of thing, Cadus Corporation (KDUS) was another Icahn controlled nano-cap where he bought a dozen or so luxury homes in south Florida into an NOL shell, it generated no revenue during this period and Icahn offered to take out the equity for $1.30 per share prior to the first property sale, eventually bumping it twice to the final takeout of $1.61 per share.  We could see a similar bump with VLTC, what's a few hundred thousand more to secure access to a $500MM NOL?  But I'm also not counting on it, there are only 4 board members, 2 of which are affiliated with Icahn including the Chairman, although he's somehow considered independent despite being on many Icahn controlled boards and owns zero shares -- there are no friends to minority shareholders here to provide much resistance.  Also, the equity (placing no value on the NOL) isn't worth anything after deducting the revolver and preferred stock.  Despite all that, given Icahn's history and recent moves to clean up his empire, I think the offer will at least hold with a slight chance of a bump to secure it getting done.  Today it trades for $0.50 per share, offering an absolute return of 16% over 6-9 months it'll take to complete.

Disclosure: I own shares of VLTC

8 comments:

  1. Couldn't he just put the company through bankruptcy and gain control that way?

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    1. Presumably could, although the revolver probably isn't impaired? Can the preferred stock can just PIK until eternity?

      And would the legal/other expenses be more than $2.5MM? This route is simpler, probably quicker, more certain, but bankruptcy could be a negotiating tactic to accept the $0.58, sure.

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  2. Does any of these two conditions worry you?

    " In addition to customary conditions, closing of this transaction would be subject to the following non-waivable conditions:

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    First, the transaction must be approved by a special committee of independent directors of Voltari that has been empowered to freely select its own advisors and to reject the transaction definitively should that be its business judgment; and

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    Second, the transaction must be approved by an informed vote of, or tender by, the holders of a majority of the shares of Common Stock held by shareholders who are not affiliated with us."

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    1. Not particularly:

      1) There are three "independent" board members, including the Chairman, who has made a second career serving on Icahn boards, he could be a swing vote.

      2) The equity isn't really worth anything to anyone besides Icahn because of the preferred stock, now that arbs are moving into the name, makes it even more likely that shareholders would approve. I could be wrong, but I don't think there are any other substantial holders.

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  3. Sold out for a quick gain. Unfortunately I didn't manage to build a large position in time. Thanks for a great idea!

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    1. Surprised to see it trade all the way up to the $0.58 prelim offer, I was offline yesterday so I'm still holding. Seems doubtful the market is sniffing out a higher offer already.

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  4. Whats going on...VLTC $0.68? Did he up his bid?

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    1. No idea! But I'm out now, bid at $0.60, above where Icahn's proposed bid is at, don't see any change to the 13D.

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