From Barrons:
December 13, 1999
Barron's Table
Investment Picks by Jamie Dinan and Dan Schwartz
Category and Company Symbol Recent Price Comment
Distressed Securities
Rite-Aid debt and stock RAD 11 (stock) New management; asset sales likely. Stock could hit 20.
Hidden-Value Situations
Global Light Telecom GBT 10 1/2 Close to selling asset whose value could exceed whole price.
MRV Communications MRVC 36 Could take two fast-growing units public soon.
Comdisco CDO 26 Cash-cow core business plus hot DSL unit.
Merger Arbitrage
US West USW 66 Headed for 20% annualized return by deal's closing.
(Short) Qwest Communications QWST 38 1/2 Bullish on company post-merger. Target is $47.
December 13, 1999
Barron's Features
Interview, Part 2
Interview, Part 1
Q: What are you currently seeing as good individual opportunities? Are there any poor distressed companies in this great economy?
Dinan: Actually, one of those is Rite-Aid. We bought quite a bit of the company's debt. It's the first time we actually made a relatively large bet in a distressed situation in quite some time. Rite-Aid, as you probably know, had some accounting problems. The former CEO was probably not on the up-and-up and the stock went from 50 to 7. The bonds got downgraded from investment to junk and fell dramatically in price. These bonds, we bought in the 60s and 70s [cents on the dollar] with yields to maturity in the 20% range. Leonard Green Partners put in $300 million, which is why we got interested. We think Leonard Green is probably the best investor out there, from the standpoint of troubled retail companies.
[Last Monday] they announced a new management team. They brought the guys from Fred Meyer over. The debt is actually up 10%-20% in price, but we still like it, even at these levels. Yields are still in the mid- to low teens on the senior paper, about 20% on the junior paper. Even though prices have gone up and most of the debt is now trading in the 70s, we still think these things can move up into the high 80s-low 90s, particularly if the company goes ahead and sells their PCS Health Systems business, as well as their shares of drugstore.com.
Q: Is that why, in addition to Leonard Green's investment, you originally thought it was a good buy?
Dinan: That's exactly right. We think the stock could be worth about $20 a share. The company currently has about $13 billion in revenues and you give it a 7% cash-flow margin, which is actually at the low end of what the industry is capable of achieving, and you put a 10 multiple on that, which is about a 20% discount, subtract out the debt -- you basically have a $19 stock price. And the good thing is, the top line is still growing.
Q: Dan, what looks good in the way of hidden-value special situations these days?
Schwartz: The first one I would like to talk about is a company called Global Light Telecommunications. We think we are going to get a big payout in the near term in one of Global Light's assets and the stock is at a substantial discount to that one asset alone. We're getting the rest of the store, which we think is pretty exciting, free.
The asset that we think we are going to get paid on pretty quickly is Global Light's 49% stake in Bestel, the third-largest long-haul fiber network in Mexico. Global Light has hired CS First Boston to sell half their interest in Bestel. We think that if the company gets the right price they will sell its whole interest. Based on some of the transactions that have been done, we think a very reasonable multiple for this business would be four times [the value of property, plant and equipment], which at the end of the year will be about $260 million. Four times PP&E would net Global Light a little over $15 a share if it sold its whole interest, and the stock right now is trading at about 10 1/2 . You are getting the other businesses, which we think are extremely attractive, for nothing, or even less than nothing.
One of those is Highpoint Telecommunications, which is now listed up in Canada and is looking to build a fiber-optic network in Europe. What makes this different from all the other fiber networks that are being built in Europe is they are targeting Tier 2 and Tier 3 cities that haven't really been targeted by anybody else.
Another interesting asset Highpoint owns is a joint interest in the second-largest international telecommunications company in Canada, North American Gateway. And they are going to take that public probably sometime in the first half of next year. We think that asset alone counts for the current stock price of Highpoint. Right now, based on where Highpoint is trading, it is worth around $3 per Global Light share. But we think there is a multiple upside. And of course, they are going to be getting $15 a share cash into the bank. These guys are very savvy businessmen. If the stock is trading at 15 or below 15 it's a no-brainer to buy back stock. Management owns a lot of stock. I think we are the largest shareholder in this company.
Q: Where else are you seeing similar value plays?
Schwartz: One is MRV Communications, which we've held for only a month or so now. MRV makes networking equipment, and it also built a large and profitable optical-components business. We view MRV as almost an event-per-quarter stock. By that I mean there are a lot of things going on in terms of IPOs and spinoffs. If you speak to the company, they will tell you they have hired a top-tier banker to explore alternatives for optical access. We think the optical access business is going to go public or at least file their registration statement some time in the first quarter. And we think they are going to bring in a high-profile CEO. The business makes money, it has a good revenue base, and we think it has a lot of potential.
There are other businesses where a lot of interesting stuff is happening, too. After the optical business we think the next business to go public will be a company called Hyperchannel, which they control, an online fulfillment center for networking products. It is growing very, very rapidly. We think that business could be poised to go public, maybe even file in the first half of next year. Then there's a substantial minority interest in a company called New Access, which is doing next-generation multiplexing technology, the kind of stuff that Sycamore does. Kleiner Perkins and Juniper Networks have both invested in it in the second round of financing. Obviously, to attract that kind of attention, the product has to be real. If you do a sum-of-the-parts analysis you can get anywhere from the 60s-70s to ridiculous numbers on the stock [which was recently at 35].
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