Crazy? Or crazy like a fox?
IDT's Howard Jonas has a million ideas. He's lost $1 billion.
Read about his latest scheme
August 29, 2010 5:59 AM
By Aaron Elstein
crainsnewyork.com
[pic -- HOWARD'S END: IDT founder Howard Jonas in 2003, with a vintage station wagon and an Emmy Award.]
Every day, entrepreneur Howard Jonas says, he fights an imaginary hydra-headed creature called the Meligoth.
“You may be going in a direction no one's ever gone in, or trying things that have never been done before. People will tell you you'll lose,” he writes in his autobiography. “In the face of the most overwhelming odds, I go out to do battle, to slay the Meligoth.”
The Bronx native and former vendor of hot dogs, mail-order horoscopes, teak chopsticks and travel brochures credits his drive to battle his monstrous foe for turning him into a telecommunications executive who, at least back in 2000, was one of the nation's most successful. Mr. Jonas' IDT Corp. was a pioneer in driving down the cost of long-distance calls, becoming hugely popular in the mid-1990s thanks to its innovative “1-800-SCREW-AT&T” marketing campaign.
After shaking up Ma Bell, and amassing a $400 million fortune in the process, Mr. Jonas is now focused on a different monster: the world's petro-states.
He intends to challenge them by figuring out how to unearth billions of barrels of oil buried in rocks in western Colorado. And he'll commit a substantial portion of what's left of IDT's cash pile to the task. IDT, which nowadays specializes in selling phone cards to immigrants, is one of three companies authorized by the federal government to develop ways to extract oil from shale. In Mr. Jonas' estimation, if IDT succeeds in its highly ambitious quest—one that for decades has foiled giants Royal Dutch Shell and Exxon Mobil—it could make life considerably less comfortable for Saudi Arabia's princes, Iran's mullahs and Venezuela's Hugo Chavez.
Mr. Jonas sees his latest mission as nothing short of freeing the nation from its reliance on foreign oil and reviving the stagnant economy. It would relieve the U.S. of “the worst dependence on energy sold to us by hostile totalitarian regimes,” Mr. Jonas told investors during a conference call earlier this summer.
“Imagine how strong we would be if we do not have to waste hundreds of billions of dollars a year to buy oil,” he went on, according to a transcript from SeekingAlpha.com. “This will lay the groundwork for another great American renaissance, a renaissance in the manufacturing industry and innovation that counters the current state of decline.”
Success would certainly transform Newark-based IDT. The president of IDT's shale oil division, Claude Pupkin, estimates that at current prices for crude, the company could generate up to $1.3 billion a year in revenue from selling oil, before government royalties. That's a tidy payday for a phone company that posted a $155 million net loss last year on $1.5 billion in revenue.
Mr. Jonas' gambles have paid off in the past, but some investors are none too pleased with his latest throw of the dice.
“It's a Hail Mary pass,” grumbles Thomas Kahn, a Manhattan money manager whose firm is IDT's biggest shareholder, after Mr. Jonas. “I've told Jonas, 'Don't focus on the shale project; it's a long shot.' But he can't help himself.”
“Howard is a brilliant guy,” Mr. Kahn continues. “He's like a machine gun, with 100 ideas coming a minute. A lot are ridiculous, some are stupid and others are brilliant.”
The power of onions
The 54-year-old Mr. Jonas has been taking risks ever since age 14, when he fixed an old pushcart and sold hot dogs in front of a Bronx methadone clinic and opposite a bar called the Tender Trap. The secret of his success, he wrote in his 1998 autobiography, On a Roll: From Hot Dog Buns to High-Tech Billions, was high-quality onions, befriending the folks at the bar who donated ice to keep his drinks cold, and a willingness to take a leap into the unknown. “If you really want to do something, even if you have to come in on a wing and a prayer, go for it,” he wrote. “Most things will fall into place later.”
IDT, for its part, has been struggling to find its footing after a great start. It only recently returned to profitability following a miserable nine-year stretch during which it frittered away all but $180 million of the money it made beating up on AT&T. Among its projects: a movie studio, a conservative talk radio network, comic books and canned food. Huge losses forced Mr. Jonas to shed peripheral businesses. His focus now is exclusively on the phone business and his energy effort.
The energy IDT seeks to tap, shale oil, is the petroleum world's Holy Grail. Rand Corp. estimates 1.1 trillion barrels of recoverable oil lie in the shale rocks of Colorado, or triple Saudi Arabia's proven reserves. But capturing this resource has eluded Big Oil for decades. The last big push ended in the early 1980s when Exxon and other big explorers pulled the plug on billions in investments.
The problem with oil shale boils down to this: Separating oil from rocks requires a huge amount of energy and generates a massive mess. Unless the market price for crude is about $100 per barrel, says Rand analyst James Bartis, traditional oil-shale mining isn't worthwhile.
IDT thinks it has a better, more environmentally sustainable plan. Its project, called American Shale Oil, was started by Wes Perry, a veteran oil investor and mayor of Midland, Texas—the childhood home of former President George W. Bush, whose administration awarded leases to extract oil from Colorado's shale rocks to Shell, Chevron and Mr. Perry's small operation. IDT bought 90% of Mr. Perry's company in 2008 for $5.5 million.
'The poor man's approach'
Rather than dig up the shale and heat it to 800 degrees to release the oil, IDT's plan is to inject large amounts of heat underground and then suck out the oil as it's loosened from the rock. The in situ mining process is much cleaner than traditional oil-shale extraction methods, says Mr. Pupkin.
IDT's approach isn't new or unique. Shell says it's been developing in situ technology since 1980 without success. But Mr. Pupkin says he's “highly confident” his company will succeed because its plans are less ambitious than those of most rivals. He says IDT intends to extract up to 2 billion barrels of oil by digging below an aquifer that runs through much of Colorado's shale, even though that would mean pumping out much less oil than could be had by mining above the water table.
“We're doing the poor man's approach,” he says, adding that the company has spent nearly $20 million on the project so far. However, the final bill will be far higher. Mr. Pupkin says it will take billions more to complete, which is why IDT has signed on French oil giant Total as a 50% partner.
Mr. Pupkin warns that the project won't be commercially viable for at least five to seven years. Even that might be optimistic. A spokesman for the U.S. Bureau of Land Management says, “None of the [oil shale] research projects is near to showing commercial potential.”
Mr. Kahn's grumbling notwithstanding, investors are tantalized. After Mr. Jonas spoke about his oil-shale project on CNBC this past June, IDT's stock doubled to $18 a share, though it has since retreated a bit. It is still up 200% this year. One reason for the excitement may be that Mr. Jonas, who was unavailable to be interviewed for this article, told CNBC that IDT's cost of extracting the oil could be as little as $25 per barrel. Considering that the price of crude is about $75 a barrel, the potential windfall is obvious.
Mr. Pupkin backs off his boss's projection, calling it “very preliminary.” But he does point out that the Colorado oil is so pure, it barely needs refining. He adds that IDT has another oil shale project in Israel in which famed hedge fund manager Michael Steinhardt is an investor. And the opportunity is even vaster than in Colorado. According to Mr. Pupkin, IDT's leased Israeli land holds an estimated 50 billion barrels that could be easier to extract because there's no aquifer to worry about.
That so many investors are excited by Mr. Jonas' project is a testament to his pitch-perfect sense of how to make a sale.
After a decade in the travel brochure and publishing business, often operating from a vintage station wagon, he stumbled into telecommunications in 1990. To stay in closer touch with an employee moving to Israel, he came upon a system that helped customers abroad save money on international rates by routing calls through numbers inside the U.S. He founded IDT that year and took it public in 1996, minting more than $100 million in the process.
Three years later, he scored another coup when IDT took public Net2Phone, a pioneering Internet service it developed. But he hit his biggest jackpot in 2000, when he sold a majority stake in Net2Phone to AT&T for $1.1 billion. Suddenly, the entrepreneurial, sassy upstart IDT was really, really rich.
Alas, it had no idea what to do with the money.
Over the next several years, it bought or started a slew of ventures that it later sold or abandoned. They included taking a stake in the company that owned Archie comics; starting a credit card collections agency; selling beans, rice and other foods to Hispanic consumers under the Vitarroz label; and launching a radio network called Liberty Broadcasting that featured such commentators as William Kristol and Linda Chavez.
IDT even started a movie studio that acquired, among other things, the Emmy Award-winning animation studio for The Simpsons and King of the Hill. It produced a full-length animated feature in 2006 called Everyone's Hero, which follows a boy's 1,000-mile journey to help the New York Yankees win the World Series and includes the voices of Whoopi Goldberg and Brian Dennehy. Mr. Jonas, credited with writing the story, is a big Yankees fan.
Burning through a billion dollars
Unfortunately, most of IDT's non-phone ventures lost buckets of money. The credit card collections business was a particular dud. IDT sold it last year for $18 million, or $60 million less than it paid to enter the arena. Meanwhile, the phone business struggled, too, squeezed by relentless competition. All told, IDT piled up $1 billion in losses between 2002 and 2009, bleeding red ink in every year except 2007 when it sold its entertainment division to John Malone's Liberty Media for $220 million in cash plus other considerations.
“We lost our focus,” says Bill Pereira, a longtime employee who became IDT's chief financial officer last year with a mandate to clean up the mess. “We got into fields where we had no expertise.”
As the company burned through its cash pile, IDT's stock sank to as little as 72 cents a share in 2008, from a reverse split-adjusted peak of $65. Mr. Jonas, whose holdings grant him 76% of IDT's voting power, saw the value of his stock collapse to $4 million, a 99% drop.
IDT arguably hit rock bottom last year. Amid a furious downsizing that saw the company cut its costs in half, the company abandoned the headquarters building in downtown Newark that it had acquired only the year before for more than $50 million. The building is now vacant, though it still bears IDT's logo and a sign at the entrance declaring: “Through these doors pass the finest professionals in the world.”
Meanwhile, the Internal Revenue Service audited IDT and forced the company to cough up $115 million in unpaid taxes and interest. Now, New York and New Jersey tax officials are conducting audits. Mr. Pereira attributes the audits to cash-strapped states hunting for extra revenue.
As he tries to find ways to rebuild IDT's fortunes and change its reputation for burning through cash, Mr. Pereira insists he doesn't dwell on the oil business. “I leave that,” he says, “to the visionaries.”
BEYOND PHONE CARDS: IDT’S SORRY RECORD OF DIVERSIFICATION
CREDIT CARD COLLECTIONS BUSINESS
Launched in 2006 with $78 million purchase of debt portfolio. Generated operating losses of $77 million until IDT sold the portfolio in 2009 for $18 million and exited the business.
VITARROZ FOOD PRODUCTS
An IDT subsidiary bought it in 2006 for $5.2 million. IDT’s ethnic grocery division produced $7.3 million in losses over 2008 and 2009, and the company exited the business in 2009.
IDT GLOBAL ISRAEL
Launched in 2003 at undisclosed cost. Generated $19 million of losses over three years ended in 2008. Sold in 2008 for what IDT calls a “nominal amount” and recorded an $8.8 million loss.
LIBERTY BROADCASTING
IDT bought a radio network in 2001 for an undisclosed sum and launched a conservative talk network in 2003. Sold it in 2005 for an undisclosed amount after suffering $7 million in write-downs.
IDT ENTERTAINMENT
Launched in 2003. Generated about $40 million in losses over its life before it was sold in 2007 for $220 million in cash and other considerations.
HEADQUARTERS AT 520 BROAD ST., NEWARK
IDT acquired building in 2008 for more than $50 million in cash and assumed debt. Abandoned building in 2009 as staff shrank. Building is now empty. |
