SYTE - Enterprise Diversified

[KJP]

So beyond all of the obvious problems, no ownership of the GP? Just passive investment as LPs, paying the manager a fee?  Apparently by "asset management business" SYTE means that it will be paying fees to asset managers.

 

Although Sitestar isn't getting an equity stake in the GP, it is getting a portion of the management fees generated by the fund, according to a letter that Alluvial sent to its clients.

[stahleyp]

I've not kept up with this a lot but if they seeded with $10 million and got no ownership stake that is wild. I believe even MKL got a piece of good haven (granted it was a mutual fund and not a hedge fund but still) when they helped seed them.

[NeverLoseMoney]

I think shareholders who bought shares when Frank Erhartic was still CEO don't have that much to complain about, really.

So you're saying because Steve Kiel is only slightly worse than Erhartic, investors should be happy with what they've got?

I'm saying those early investors mainly have themselves to blame if they do feel unhappy today. I'm certainly not saying Steven Kiel is worse than Frank Erhartic.

I think many people only became involved in this company after reading Jeff Moore's posts about Sitestar on his blog.

Nonsense. Most people got involved because of the cash flow generated by the internet business.

How many people would even have bothered to look at this company, let alone invest in it, if it were not for those posts on Jeff's blog?

Jeff is a smart fellow and provided insight, no doubt whatsoever, but the company was followed before he got involved.

Fair enough. I don't know what moved people to invest in Sitestar. My impression is that those posts by Jeff gave at least some investors the feeling that they got to know Frank Erhartic and that this feeling gave them increased confidence in the investment. If so, they were very wrong.

I think anyone who first invested when Mr. Erhartic was in charge deserves a huge loss on their investment.

This is a ridiculous statement. Just because Erhartic was a lousy CEO, it doesn't automatically make Sitestar a zero.

I didn't say "a zero". I am saying that if you invest in a company where the CEO has a large stake in the business and he engages in the kinds of acts that are being described in the lawsuit, then you're going to get a terrible result if that CEO keeps running the show for many years. So activist intervention was required to salvage the situation. If people aren't happy with the activists that turned up and what they did subsequently, than that means that they shouldn't have invested in a company that required intervention. I think investors should own up to their mistakes. We all make them. The only question that matters after making one is: what could I have done differently? I just see a lot of finger-pointing, but no people that admit they got it wrong by investing in this company when Mr. Erhartic was the CEO.

Luckily small shareholders received a huge bailout, because thanks to the efforts of large shareholders Jeff Moore, Steven Kiel and one or two others, value can now be salvaged instead of it continuing to be destroyed by the former CEO.

You have a funny definition of a bailout. But yes, value is being salvaged, it's been salvaged for the benefit of Steve Kiel.

My impression of Steven Kiel is different than yours, but I could be wrong. Other investors don't seem to see things as negatively yet, the stock hasn't declined much after today's news. I would have expected at least some large shareholders to be selling strongly, judged by the posts of some large holders in this thread.

[ScottHall]

If you guys have a problem with what they're doing, maybe you should put up or shut up. Complaining isn't going to solve any of the perceived problems.

 

No position.

[TBW]

I don't think people are thinking about this dilution correctly.  Sure your ownership percentage is less but given that the cash is coming to the company your asset base is a lot higher.

 

For example even at the really low price of 0.048 your dilution in my estimation is only ~10%.  The previous raise was more like 20%.  So to keep it simple call it 30% all-in.  These guys have tracks records in the 20% annual return range so if you ascribe any value to that  (which you certainly don't have to) say a dollar raised this year makes a 20% return and discount it back at a rate of 10% to today, that would add back ~9%.  So you are looking at dilution in the range of 20 to 30%.  I am not sure that is as terrible as everyone seems to think.  If one looks at the high stock price of .08 (not that many shares actually changed hands there) it's only down 14% from there.  So unless a seller is motivated the mkts appear to be seeing this the way I am.

 

Initially I too really did not like the price, the mechanism to raise capital and also did not understand the quorum issue.  I emailed management, they responded immediately and after a discussion I really think they are doing the right thing given the situation at hand.  I strongly urge you to reach out and I would be surprised if you didn't think so too after speaking to them.

 

I personally think management is doing some impressive things.  I did not know them prior to meeting them today at the meeting and came away very impressed.

 

I think if one was to take issue with their strategies or future plans for the company that is fine as everyone looks at business opportunities differently and everyone is entitled to their opinions.  However taking issue with the character of management given the capital raises is misguided until you hear the whole story.

[matts]

I don't think people are thinking about this dilution correctly.  Sure your ownership percentage is less but given that the cash is coming to the company your asset base is a lot higher.

 

For example even at the really low price of 0.048 your dilution in my estimation is only ~10%.  The previous raise was more like 20%.  So to keep it simple call it 30% all-in.  These guys have tracks records in the 20% annual return range so if you ascribe any value to that  (which you certainly don't have to) say a dollar raised this year makes a 20% return and discount it back at a rate of 10% to today, that would add back ~9%.  So you are looking at dilution in the range of 20 to 30%.  I am not sure that is as terrible as everyone seems to think.  If one looks at the high stock price of .08 (not that many shares actually changed hands there) it's only down 14% from there.  So unless a seller is motivated the mkts appear to be seeing this the way I am.

 

Initially I too really did not like the price, the mechanism to raise capital and also did not understand the quorum issue.  I emailed management, they responded immediately and after a discussion I really think they are doing the right thing given the situation at hand.  I strongly urge you to reach out and I would be surprised if you didn't think so too after speaking to them.

 

I personally think management is doing some impressive things.  I did not know them prior to meeting them today at the meeting and came away very impressed.

 

I think if one was to take issue with their strategies or future plans for the company that is fine as everyone looks at business opportunities differently and everyone is entitled to their opinions.  However taking issue with the character of management given the capital raises is misguided until you hear the whole story.

 

OK, so can you fill us in then?

 

[InelegantInvestor]

If you guys have a problem with what they're doing, maybe you should put up or shut up. Complaining isn't going to solve any of the perceived problems.

 

No position.

How would you suggest we go about "putting up"?

[InelegantInvestor]

I don't think people are thinking about this dilution correctly.  Sure your ownership percentage is less but given that the cash is coming to the company your asset base is a lot higher.

 

For example even at the really low price of 0.048 your dilution in my estimation is only ~10%.  The previous raise was more like 20%.  So to keep it simple call it 30% all-in.  These guys have tracks records in the 20% annual return range so if you ascribe any value to that  (which you certainly don't have to) say a dollar raised this year makes a 20% return and discount it back at a rate of 10% to today, that would add back ~9%.  So you are looking at dilution in the range of 20 to 30%.  I am not sure that is as terrible as everyone seems to think.  If one looks at the high stock price of .08 (not that many shares actually changed hands there) it's only down 14% from there.  So unless a seller is motivated the mkts appear to be seeing this the way I am.

 

Initially I too really did not like the price, the mechanism to raise capital and also did not understand the quorum issue.  I emailed management, they responded immediately and after a discussion I really think they are doing the right thing given the situation at hand.  I strongly urge you to reach out and I would be surprised if you didn't think so too after speaking to them.

 

I personally think management is doing some impressive things.  I did not know them prior to meeting them today at the meeting and came away very impressed.

 

I think if one was to take issue with their strategies or future plans for the company that is fine as everyone looks at business opportunities differently and everyone is entitled to their opinions.  However taking issue with the character of management given the capital raises is misguided until you hear the whole story.

Yes my asset value was not fully diluted, but my voting rights were.  I have emailed management and have generally gotten no response. I believe I have heard the whole story. If there is more to it, by all means, share it.

[InelegantInvestor]

What a circus.

 

The value investing community love throwing stones about shareholder representation and ethics from the outside but once a pot of gold is in sight the average value investor has the same motivations of greed as any other.

 

This nonsense about a satisfactory end justifying questionable means is the same backwards thinking that prevents people like Biglari from being held to account.

Biglari is an apt comparison. How long before the company changes its name to Kiel Holdings?

[Spekulatius]

This is an Animal Farm and we know who the pigs are.

[rkbabang]

What a circus.

 

The value investing community love throwing stones about shareholder representation and ethics from the outside but once a pot of gold is in sight the average value investor has the same motivations of greed as any other.

 

This nonsense about a satisfactory end justifying questionable means is the same backwards thinking that prevents people like Biglari from being held to account.

 

+1

It's always so easy to justify it to yourself. "It's okay when I do it"

:(

[IceCreamMan]

I took notes at the meeting yesterday and am posting them below.

 

Steve Kiel did most of the talking. I missed his opening comments and then he introduced the rest of the board of directors.

 

He announced that a press release had gone out at 10:30 and read it aloud. It announced a seed investment with Dave Waters' Alluvial Capital.

 

The rest of the meeting was in the Q and A format.

 

With the HVAC fund, they're targeting pre-tax ROE of 25% in year 1. This is after the profit share agreement.

Nathan Reid (HVAC) hired a COO.

Steve met Nathan met 6-7 years ago at a Berkshire meeting. Nathan discussed the HVAC idea at this year's Markel breakfast.

 

Steve said that Sitestar will share in the revenue stream of Alluvial.

 

With regard to Alluvial, Sitestar must consider 40 Act requirements, which limit investment securities to 40% of assets.

 

All prior goodwill was attributed to the internet business. Going forward, it will probably be attributed to the HVAC business.

 

They are continuing to cut costs in the internet business. There was a tiny increase in revenue from Q1 to Q2. There shouldn't be seasonality in the business.

 

There was a question about why additional domain names were purchased. Steve said that it was to keep the business of customers using e-mail addresses on domains that Sitestar didn't own.

The highest margin revenue is dial-up and e-mail addresses. I think he said that 75-80% margin is typical for dial-up and storage.

first.com is on the books for $200k and Sitestar has received offers above $200k, but they are hoping for more.

 

DSL and fiber are lower margin, but Sitestar may get revenue growth from these services.

 

Managers such as Nathan and Dave make their own decisions. Steve is responsible for making decisions on securities in the investment portfolio at the corporate level. Approval for subsidiaries is at the board level.

 

A question came about the pricing of the capital raise. Steve said that some things about the private placement can't be discussed. The company was not close to reaching a quorum. The SEC would not have approved a rights offering, which requires an S-1 filing. They had met zero out of the five requirements to issue shares electronically. (It sounded like he thought they would eventually meet those requirements.) He said that there would not have been interest from investors at a price above book value after considering the illiquidity and frictional costs of the unregistered shares.

 

Question about capital structure and leverage. Earn-outs are on the balance sheet as borrowings. Basically, none of the segments use debt. The plan in the future is "to be determined." Sitestar currently has the ability to issue preferred, but it is unlikely to do so because the market would demand interest rates that are too high. The new CFO will go to banks to ask about borrowing against the company's rental properties and see what loans are available.

 

Question about corporate expenses run rate. Q2 was "out of control." He wants the company "as lean as possible" but "run like a public company" (I think with regard to audit and filing expenses). The company hired a consultant to advise on internal controls. The new CFO can do some of the accounting work that was outsourced.

 

Question about how the company will use the HVAC cash flows. Steve hopes to reinvest them. Investment opportunities are good because sellers of HVAC companies are limited in their choices of buyers.

 

Compared to when he joined the company, Steve is more optimistic about the internet business and less optimistic about the real estate.

 

Question about return hurdles or targets for investment securities portfolio. Steve avoids these because he thinks that they could change and feels that investing is more of an art than a science.

Question about conflict of interest from managing outside money in addition to Sitestar's portfolio. He says that Sitestar's portfolio currently consists of two holdings that are highly liquid and low risk, and therefore would not be suitable holdings for any of the outside partnerships that are being managed. Policies will be put into place for the board of directors to prevent conflicts of interest.

 

Question about performing shareholder activism on stock holdings. He wants Sitestar to be known for solving problems. Maybe provide resources along with investments. But not a white knight like Berkshire. Sometimes there will be opportunities to help investee companies. He sees optionality in buying private companies.

 

Steve says he aspires to the "Outsiders" companies: centralized capital allocation, decentralized operations, and a familial culture.

 

I got the impression that Sitestar's management team isn't allowed to solicit for the newly announced private placement. If you're interested in participating, it may be a good idea to contact management for further information.

 

[InelegantInvestor]

I took notes at the meeting yesterday and am posting them below.

 

A question came about the pricing of the capital raise. Steve said that some things about the private placement can't be discussed. The company was not close to reaching a quorum. The SEC would not have approved a rights offering, which requires an S-1 filing. They had met zero out of the five requirements to issue shares electronically. (It sounded like he thought they would eventually meet those requirements.) He said that there would not have been interest from investors at a price above book value after considering the illiquidity and frictional costs of the unregistered shares.

 

 

Thanks for the notes. The repeated claim by Mr. Kiel that there would not have been interest at a higher price is dubious. As it is, the vast majority of the placement was taken up by Kiel through Arquitos and Santa Monica Partners. How was this conflict cleared to arrive at a fair value and avoid self-dealing?

[Guest roark33]

My legal background tells that not being "allowed" to disclose details of an already completed private placement is complete BS. 

 

 

[LR1400]

What total size are they talking about for the HVAC rollup?

[Poor Charlie]

So beyond all of the obvious problems, no ownership of the GP? Just passive investment as LPs, paying the manager a fee?  Apparently by "asset management business" SYTE means that it will be paying fees to asset managers.

 

Although Sitestar isn't getting an equity stake in the GP, it is getting a portion of the management fees generated by the fund, according to a letter that Alluvial sent to its clients.

 

Was this information in one of the Alluvial quarterly reports?  I'm curious if it's a percent of revenues or percent of profits?  Also curious to know the total amount of capital they're looking to raise and what the incentive fee arrangement would look like?  Thanks!

[KJP]

So beyond all of the obvious problems, no ownership of the GP? Just passive investment as LPs, paying the manager a fee?  Apparently by "asset management business" SYTE means that it will be paying fees to asset managers.

 

Although Sitestar isn't getting an equity stake in the GP, it is getting a portion of the management fees generated by the fund, according to a letter that Alluvial sent to its clients.

 

Was this information in one of the Alluvial quarterly reports?  I'm curious if it's a percent of revenues or percent of profits?  Also curious to know the total amount of capital they're looking to raise and what the incentive fee arrangement would look like?  Thanks!

 

The information was in a letter to clients sent out yesterday.  The letter provided no additional information on the issues you mentioned.

[Sunrider]

A somewhat simple question on the dilution point - there are 100 shares and the book value is $100, assume all in cash. Management raises new funds to invest in [hedge fund] or [toilets] or [mars greenhouses]. The total size is 1000 shares for $1000.

 

Effect immediately after:

 

1100 shares with cash book value (=equity value) of $1100.

 

No dilution - but of course investing that cash into [] may or may not be a good use of funds.

 

... just wondered why people complain about 'dilution' for the Alluvial raise - shares get issued for cash, which accrues to equity value, so that's not really dilution, no?

 

 

[InelegantInvestor]

A somewhat simple question on the dilution point - there are 100 shares and the book value is $100, assume all in cash. Management raises new funds to invest in [hedge fund] or [toilets] or [mars greenhouses]. The total size is 1000 shares for $1000.

 

Effect immediately after:

 

1100 shares with cash book value (=equity value) of $1100.

 

No dilution - but of course investing that cash into [] may or may not be a good use of funds.

 

... just wondered why people complain about 'dilution' for the Alluvial raise - shares get issued for cash, which accrues to equity value, so that's not really dilution, no?

 

 

Perhaps I'm being imprecise but I've been referring to dilution of my voting power, which has been quite significant.

[Tim Eriksen]

A somewhat simple question on the dilution point - there are 100 shares and the book value is $100, assume all in cash. Management raises new funds to invest in [hedge fund] or [toilets] or [mars greenhouses]. The total size is 1000 shares for $1000.

 

Effect immediately after:

 

1100 shares with cash book value (=equity value) of $1100.

 

No dilution - but of course investing that cash into [] may or may not be a good use of funds.

 

... just wondered why people complain about 'dilution' for the Alluvial raise - shares get issued for cash, which accrues to equity value, so that's not really dilution, no?

 

In the case of all cash you are correct.  There is no dilution.  The reason that there is no dilution is not that the issuance is at book value, it is that intrinsic value and book value are "identical" in your scenario.  That is rarely the case.  If you believe intrinsic value is substantially higher than book value you will believe you are being diluted.  The challenge with Sitestar is what is/was intrinsic value as a going concern?  What is/was it in liquidation?  What is it after the HVAC deal?  What is it after the Alluvial deal?     

[Sunrider]

Agree with one caveat - pre Alluvial BV matters, not value after, which is contingent on the raise. Also straight after the raise, the company has not economically diluted shareholders, provided it issues at BV and BV is appropriate. The decision as to what to do with the cash raised is a secondary matter.

 

I do agree, by the way, with the notions expressed here that the private placement doesn't just smell fishy (including justifications provided) but stinks.

 

C.

 

 

A somewhat simple question on the dilution point - there are 100 shares and the book value is $100, assume all in cash. Management raises new funds to invest in [hedge fund] or [toilets] or [mars greenhouses]. The total size is 1000 shares for $1000.

 

Effect immediately after:

 

1100 shares with cash book value (=equity value) of $1100.

 

No dilution - but of course investing that cash into [] may or may not be a good use of funds.

 

... just wondered why people complain about 'dilution' for the Alluvial raise - shares get issued for cash, which accrues to equity value, so that's not really dilution, no?

 

In the case of all cash you are correct.  There is no dilution.  The reason that there is no dilution is not that the issuance is at book value, it is that intrinsic value and book value are "identical" in your scenario.  That is rarely the case.  If you believe intrinsic value is substantially higher than book value you will believe you are being diluted.  The challenge with Sitestar is what is/was intrinsic value as a going concern?  What is/was it in liquidation?  What is it after the HVAC deal?  What is it after the Alluvial deal?   

[hillfronter83]

The whole market cap of Sitestar is only a few millions. I found it hard to believe people, especially successful aspiring money managers, would risk their reputation for such amount. While I understand why minority holders are frustrated with lack of transparency, I would give them the benefit of doubt given some respected people from this board are involved such as Keith, Dave, etc.

[Foreign Tuffett]

Is part of the shareholder unhappiness that what was originally thought of as a value investment has turned into something more reminiscent of a venture capital fund?

 

Disclosure: I have never held a position in this and don't plan to.

[Spekulatius]

Is part of the shareholder unhappiness that what was originally thought of as a value investment has turned into something more reminiscent of a venture capital fund?

 

Disclosure: I have never held a position in this and don't plan to.

 

Yes, that is how I see it. The direction of the company was completely changed (scope of business, capital raises) and with none of the changes, existing minority shareholders had a say. That's said, those that don't like it, can exit their position at a fair price (imo) right now.

 

FWIW, I don't own this (never did), nor do I plan to.

[andgroup]

I have just gotten a chance to sit down and read thru all of these messages.  I have a few things to say.

 

1.) I invested in this stock after I found out that Steven Kiel was getting involved, I have followed him for 3-4 years now.

2.) If I only thought the stock would go from 4.8 cents per share to 6.6 cents per share, I would have never purchased it to begin with.

3.) Here you have a man who has brought tremendous resources to bare in cleaning everything up, and installing control systems, and preparing this company for the future.

4.) You now have an operator with a tremendous track record.

5.) You have his word that he will not invest in these private companies unless he can see more potential in them than in public markets, and his track record prior to this investment operation was phenomenal.

6.) You have a tremendous amount of capital being attracted to this company relative to what it was just a few months back.

 

If you do consider this to be your company, as I do, I cannot for the life of me see why you would be anything but grateful that the stagnant asset you held continues to mushroom in future potential.

 

If you are that concerned about the 4.8 cents to the 6.6 cents differential, you are probably not a long term investor and not suited for this stock anyways.

 

My opinion is that Steven Kiel honestly believed he could not do the things he needed to do for the company without making a huge statement about who the new sheriff in town was - both to current shareholders and to the former CEO, and he might have even been struggling with a bit of insecurity in the sense that he did not want to take any chances of losing control over something he has put so much effort into (without pay no less), especially if it is going to be a vehicle into which he will be depositing some of his best ideas.

 

At this juncture, I personally believe that the company and its expanding assets are in excellent hands, and further, I believe that Steven knows very well, that if he should permanently lose his reputational advantage (which may have taken a small hit here in the beginning -- but I believe will be fully regained in time), that he will lose far more in the long run, than any temporary advantages that strategy would grant him in the short run.

 

I believe this because after my interactions with Steven, I do not regard him to be a small minded, short term, range of the moment thinker.  I believe he has a much larger vision in mind for this company, and I am glad to be a part.

 

For the record Buffett completely changed the scope and direction of Berkshire Hathaway as well, and I don't see many people who started with him in the beginning who are bitching now.

 

"I have yet to find the man, however exalted his station, who did not do better work and put forth greater effort under a spirit of approval than under a spirit of criticism."  --- Charles Schwab

 

Sincerely,

John Woods