CLM5

Wasn't sure where to put this, but figured it fit in better here than most of the other sections. Given what's going on in the US markets, I've been looking abroad for ideas. I've found many ideas that unfortunately wind up being in countries where I cannot make purchases. One such place is India, where I've found many interesting ideas. Does anyone know if there is any way for a non-indian US citizen to buy companies listed on Indian exchanges? I was hopeful when I saw interactive Brokers list India as a supported exchange, but apparently it's only available to Indian citizens or NRIs. I've looked into opening an account with an Indian brokerage, but ran into the same issue. Hoping someone has some knowledge in this area that could be helpful. Thanks!

UPDATE: Rosetta Stone (RST) Said to Tap Adviser for Strategic Review - Bloomberg (Updated - July 17, 2020 12:29 PM EDT) Rosetta Stone (NYSE: RST) is exploring strategic alternatives including a potential sale of all or part of the company, according to Bloomberg, citing people familiar with the matter. It's working with financial advisers to gauge interest from potential private equity and strategic buyers. Fri, 17 Jul 2020 12:29:06 -0400 Copyright © 2020 StreetInsider.com

Understood on the first part. The company already shows negligible, if not negative, bottom line so a significant amount of taxes are already shielded. Like I said, they're already levered at 5-6x EBITDA which is abnormally high for a public company... not sure if it's abnormal for private or PE portfolio companies. I just can't understand how another dividend recap makes sense at this point. Your second paragraph pretty closely mirrors Kab's comment. I think this is a pretty important point and much of what I was missing. Another point is that the cap on interest expense deduction is moving from 30% of EBITDA to 30% of EBIT in 2022, which makes that much leverage look rather stupid in a few years.

What exactly are the qualifications to classify it as a return of capital vs a dividend?

Good point, I never thought of it this way.

Kab, that would make sense to me when thinking about a portfolio company that PE has held for a while. But what about a situation in which they immediately do a dividend recap? If you're trying to reduce risk and take capital off the table immediately, then why invest in the company at all... Your second and third sentences do make a lot of sense to me though, thanks for that.

Could someone who perhaps understands this better than I explain to me the purpose behind a dividend recap? They seem to be very popular among PE firms - where they purchase unlevered, private companies, lever them up, and then essentially distribute out all that cash. I don't quite understand the point of this. Sure, you get a portion of your initial invested capital back, but it can't be tax efficient (and I can't imagine after tax returns look all that enticing?), and you're leaving the company in a much worse situation as well as worth much less than when you found it. I ask because of a personal situation. I have a family member who works for a private insurance brokerage that is owned by a PE firm. The brokerage is essentially a roll up, massively levering up to go after small brokerages at low multiples. When the initial PE firm bought out the private company, it was unlevered. They then did a dividend recap, and continued to lever up to pursue a rollup. At this point, the company is levered around 5-6x EBITDA, with a lot of noise in the EBITDA/adjusted EBITDA numbers they present due to the huge amount of acquisitions they perform every year. This next part is what confuses me. Earlier this year, the initial PE firm sold their stake to another PE firm. This new PE firm intends to perform ANOTHER dividend recap with the already massive amount of leverage. I could probably wrap my head around this at a private company in an industry with highly predictable cash flows. And an insurance brokerage has pretty predictable cash flows... but when you're performing a rollup, buying out small, private mom and pop shops where the only thing you're buying is their book/relationships and they no longer have any incentive to perform for you, that scares the shit out of me. I guess I went off on a bit of a tangent there... but can anyone explain the point of dividend recaps to me? I don't understand how they produce positive results for anyone involved (excluding the banks that is...).

This just got very interesting....

I agree with everything you said. Using cash flows is definitely the cheapest and most flexible way to get it done, and they definitely have the cash flows to do it. And you're probably right that them choosing this route doesn't necessarily mean anything negative. But that doesn't change the fact that, as a shareholder, this is the option that has the largest potential downside and it's immediately felt on the balance sheet. I would much prefer no real estate development project at all to a real estate development project financed via cash flows which could have been used for a number of other things with proven returns... Edit: After thinking about it a little more, the one thing we failed to touch on would be using customer deposits to fund the permanent living facilities of the project. I don't recall them mentioning anything on this line, but if they were unable to secure any of this type of funding, that's a pretty big bummer. This would have been a free float that would have significantly reduced their cost of capital for the project. Landing this type of funding for any real estate development project is a huge advantage. I don't know if they didn't see any demand or what (which could potentially have negative implications), but I haven't seen it mentioned since their initial plans.

Maybe I'm stating the obvious here, but Verizon is at a disadvantage in either 5G or Fiber because they don't have the backhaul for it... I think the capital intensive part of a fiber overbuild is all the passings, which the cable companies already have (and what I'm now learning is that a lot of it is already fiber...). So it seems Charter or Comcast should be in a position to upgrade their entire footprint to FTTH relatively easily if they needed to. Idk why the street would be underestimating that cost, maybe companies who have attempted fiber in the past haven't designated the difference in cost between a passing and an actual connection to a premise? Another point to mention - the reason why fiber has failed in the past is because of customer penetration as a percentage of passings. Fiber would work if they could get a high enough customer penetration, but as we all know, this is a sticky business. And comcast/charter (and I'm assuming Altice) have very high customer penetration already, which would likely make any upgrade of infrastructure worth it in the long run if it led to increased pricing power and customer stickiness. This would probably make their fiber cost look cheap relative to the returns they'd see?

Yeah I believe the only capex related expense would be the replacing of modems with the new docsis, no?

Cable companies like Charter generally have fiber backbones to deliver signals most of the way and then use coax to hook up to the users' premises (e.g., Fiber-to-the-Node). Using coax in the last mile does result in a user sharing the network with the neighborhood. In Fiber-to-the-Home (FTTH), each user has their own optic cables dedicated to their building, so there is no sharing. The fact that cable cos can can deliver gig+ internet without having to dig up the streets is a major argument for the cable bull case. FTTH delivers similar speeds, but at much higher cost, so overbuilding is not usually rational. Thanks for that. When exactly did Comcast/Charter replace their backhaul infrastructure with fiber, it surely hasn't always been that way? How does "using the coax network in last mile resulting in users sharing the network" actually physically work? I guess I don't really understand how last mile works for cable. For fiber, it's essentially an ethernet cord run to the backhaul... but I'm not quite sure how cable/modems work and how that results in sharing? I actually found an article today citing an even more improved DOCSIS 3.1 which allows 10Gb download, and 1Gb upload which would effectively eliminate the only advantage fiber has over cable networks - the upload speed. Blows my mind that an upgrade to the modem (or what I'm assuming is software upgrade?) is able to provide these kind of improvement of numbers.

Cable companies like Charter generally have fiber backbones to deliver signals most of the way and then use coax to hook up to the users' premises (e.g., Fiber-to-the-Node). Using coax in the last mile does result in a user sharing the network with the neighborhood. In Fiber-to-the-Home (FTTH), each user has their own optic cables dedicated to their building, so there is no sharing. The fact that cable cos can can deliver gig+ internet without having to dig up the streets is a major argument for the cable bull case. FTTH delivers similar speeds, but at much higher cost, so overbuilding is not usually rational. I looked at the provider & noticed that they do FTTP, and was wondering if they were a threat to Charter & Comcast's business & you've clarified that they are not since they just do last mile using someone else's backbone, duh. That's not the case for all of them. The ones I mentioned, Tucows and Nelnet, used their own infrastructure to pass a bunch of houses in smaller communities.

I've been looking at some of the smaller fiber providers recently - Tucows, Nelnet,... who have gone into singular communities to provide fiber connections. Can someone explain the difference in the backhaul between the cable co's and the fiber overbuilders? I've been trying to research it, but I'm struggling to find in-depth information. A few questions that come to mind...: - Is the entire infrastructure of the cable co's copper coax cables? Charter is in the middle of their Gig rollout, and says their entire footprint will be Gig-capable by the end of 2018. So coax is capable of gig internet? Charter says their network is "fiber-rich", but I don't really know what this means. Even if something like your connection-to-the-house is fiber, and the rest of the network is coax, that shouldn't make a difference because the coax would bottleneck the network wouldn't it? So what exactly does fiber-rich mean, and what are the benefits of that? - If coax is capable of gig internet, then what really is the advantage of a fiber buildout vs the cable co's? I understand it's more reliable against weather and the pipes getting clogged up with many users, but if the potential speeds are the same, does that really justify the massive capital intensity needed to build the network for that slight improvement? - What is the difference in the way each is connected to the premise (home or business)? I've read that each fiber connection is connected directly to the network with it's own line, which implied that cable broadband did not work like that. Do you really share your broadband service with your neighbors, and how does that work? Edit: Just read this - "While Comcast offers 2Gbps download and upload speeds over its fiber-to-the-home service, Charter hasn't rolled out all-fiber services to residences yet." How is this possible if you're just making the connection to the home with fiber. Wouldn't you still be bottlenecked by the network infrastructure being coax? Obviously this isn't the case because the offering is real... I just want to understand myself how this works. This seems to make any sort of fiber overbuilder rendered useless if cable cos already have this infrastructure in place...

What don't you like about it: funding/risk? not core business/loss of focus on core? something else? The overall strategy seems to make sense on paper i.e. use airline to funnel vacationers to a resort where more of the vacationers wallet can be captured. I realize on paper and execution are two vastly different things. I'm sure you saw the presentation on sunseeker a few weeks ago. The numbers, competitive position, etc. again on paper look interesting. Did you see anything in there that gave you pause, you don't believe, was wrong etc.? I agree with you that it does make sense on paper. But there are a few things that give me pause: - They initially said that the entire project would be de-risked, funded with non-recourse debt and owner deposits. Over time, they've walked those goals backwards. We're at a point now where the only plan in place is to entirely fund the project from operational cash flows. On one hand, it's extremely impressive that an airline would be able to fund a project like this out of cash flows. On the other hand, the entire project is now a risk to shareholders. They say the budget left for the project is $420mm, which is over 20% of the entire market cap of the business. I ask you, which would you prefer.... $420mm of share buybacks at these prices, $420mm of dividends, $420mm of fleet expansion into more Airbus A320s with proven good returns on capital, or a real estate development project outside management's core competency in an unproven area? I would prefer any of the above to the real estate. The other point about the funding is if they could have funded the project without risk, they would have. This probably means, a) they struggled to get deposits on condos meaning the demand is not there, and b) they were unable to secure non-recourse debt for the project. Neither is a good sign. - I think the most important point is that Maury has been extremely successful growing ALGT over the past 17 years. The business model is pretty incredible considering the industry they're in. The returns on capital are very high, especially for an airline. The returns on capital for their new A320 fleet is likely to be above 30% for each A320 (they cost on average $17mm per plane, and they see cash returns before interest and tax of >$5mm per plane. If you believe management, they'll see over $6mm per plane). Management SAYS that there's more room to grow into their niche - more small cities with zero competition as well as a huge opportunity in underserved mid-sized cities. If you believe that they have this huge market to still grow into, then why in the hell would they pivot to this huge real estate development project when they have such high returns on capital in their core competency? It certainly makes one think that the market opportunity isn't as big as they say it is (at least the portion in which they have no competition), and they may be nearing the end of growth in their niche. - Lastly, they're doing this at a point in time where their balance sheet is more stretched than it's ever been. They just went through a fleet transition, leaving them with over $1B in debt to entirely replace their MD-80 fleet with A320s. I want to say they have about $900mm in obligations over the next 2 or 3 years, on top of that $420mm budget for the real estate project. With that being said, EBITDA-post transition should be around $350-400mm this year, and upwards of $600mm within 3 years if managements goals are believed. I think worst case operations-wise, EBITDA is $500mm in 3 years. The transition is entirely completed as of now, and costs should inflect down/earnings should inflect upwards next year. This makes the debt less of a concern. However, further large increases in the price of oil and/or a huge downturn in the economy could cause some serious concern in them being able to meet their obligations, yet they're planning on funding a real estate project with cash flows rather than shoring up their balance sheet. Also, ALGT doesn't hedge against oil either. Good in the long run, but with quick run-ups in oil prices like over the past year, it can be a bit painful. You can see from past results that yields take a bit to catch up with fuel prices, but ALGT can generally pass along their margin to customers as they don't really have competition in their niche. Even at the top of oil prices in the past decade, Allegiant maintained an impressive operating margin unlike pretty much any other US-based airline. Edit: I should say.... despite all of the reasons the real estate is not appealing, I still own ALGT. I think the fleet transition is pretty deeply misunderstood by the market, and projections going forward seem far too low to me. On the airline side, we're going to see a pretty mechanical reduction of costs and increase in ASMs over the next 3 years that is just not being recognized by the market. And the real estate project likely won't have any material affect on the income statement for quite some time ( the same obviously can't be said of the balance sheet ).