Nitin Sacheti on $VATE
Here’s my conversation with Nitin Sacheti on Innovate (VATE). You can find my podcast prep tweets here, and you can follow the podcast on Spotify, iTunes, or most other podcast players, as well as on YouTube if you prefer video! And please be sure to rate / review the podcast if you enjoy it!
Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. We use a transcription service for the transcript below; it’s entirely possible there are some errors in the transcript!
Transcript begins below.
Andrew Walker: Alright, hello and welcome to the Yet Another Value Podcast. I'm your host Andrew Walker. With me today, I'm excited to have Nitin Sacheti. Nitin is the CIO of Papyrus Capital and he is ah PM at ARS Investment Partners. Nitin, how's it going?
Nitin Sacheti: Good, Andrew. Thanks for having me. I'm excited to do this with you.
Andrew: Hey, I'm excited to have you on. Let me start this podcast the way I do every podcast. That's, first, with the disclaimer to remind everyone that nothing on this podcast is investment advice. That's going to be particularly true for today's podcast. We're going to be talking about a stock that is quite small and illiquid. I'll just note that we have some extra disclosures and disclaimers from Nitin's side that will be in the show notes. So, everyone should be sure to go and read that. Nitin also has a position in the stock. I'm sure that's important to disclose, too.
Then, the second way I started the podcast is with the pitch for you, my guest. You know, we've been swapping notes for a few months and it's been mainly on Telecom stocks, which the stock we're going to talk about today kind of touches upon. But I would just say on the Telecom side, I talk to a lot of Telecom investors. There aren't many people who both have the understanding of the space that you have and who have the breadth of the history of the space that you have. We were talking on Friday, and one thing that jumped out was, you said something along the lines of, "Oh! That thing you just mentioned, that reminds me of something John Malone said in 2007 at the Liberty annual meeting." I was like, "Oh my gosh. How many people know that?" I wasn't even following Liberty at the time, so.
Nitin: I'm a Liberty junky.
Andrew: Yeah, you're talking to the right audience for that. But look, I know you've done tons of stuff. Tons of work on the stock exchange to talk about today. You do really do due diligence. I think that's going to shine through on the podcast. So, all that at the way, let's go to the company we're going to talk about.
The company is Innovate. The ticker is V-A-T-E, many people might know it by its old ticker, which was H-C-H-C. I think it was called HC2 Holdings or something, at the time, but I'll just flip it over to you. What is VATE and why are you so interested in that?
Nitin: Thanks again for having me. In terms of disclaimers, I know, as you had said, you're going to put them in the show notes, but we do hold a position in the stock. Like you said Andrew, we will trade in and out of it. None of this should be construed investment advice in any way, so just to get that out there.
So, VATE, like you said, used to be called HC2. The company has had a very sordid history. It started off as quite a few assets several years ago. Then from 2019 onwards and especially 2020, 2021, with an Activist coming in early 2020, the company shed a lot of assets, refinanced debt, and looks very, very different today than it did a few years ago. So, that's part of the opportunity: how much the business has changed, how it's inflected, and the go-forward path that makes it so interesting to us right now.
I'll start with just what the business is today. 3 main parts to it. DBM, which is a steel fabricator, is an infrastructure business. DBM is one of the largest fabricators in the country. Steel fabrication, modeling, detailing, welding, galvanizing, building very large-scale structures. Again, one of the largest in the country, especially after they have acquired Banker Steel earlier this year. DBM did Facebook's headquarters in Menlo Park, Apples' headquarters in Cupertino. They did the Ram Stadium. They're doing the new FAB Out West Application facility of the semiconductor side. Banker did JPMorgan's headquarters at 270 Park, it's doing that right now. DBM is also doing the Clippers Stadium. So, they have a lot of a large, a lot of marquee projects. In that level of scale and know-how in the industry that does these sorts of big picture projects or large-scale projects, it's a lot of the secret sauce in this business.
So, I'd also add that with everything going on, with onshoring, and with the potential infrastructure bill, there's a lot of room for them to keep growing and winning contracts. You see that in the current backlog and I can get into that in more detail when we talk about financials. But the point is that backlog is really growing nicely. When we extrapolate the next twelve months' backlog into what we think is going to happen with revenue growth, we get to some pretty nice revenue, when we put the numbers in this business.
There are also 1700 steel fabricators in the country. They have a history of being acquisitive and rolling up into space at very high margins and multiples. With Synergy's very high levels of accretion and margin expansion. So, there are, again, 1700 steel fabricators in the country, so they really have the ability to potentially continue to roll up the space the way they have been doing in the past. So, that's the first business.
The second business that I think is of note is the Pansend Life Sciences' Portfolio. Pansend is, basically, you can look at it as a small Venture Capital Portfolio with just a handful of assets. We really like and attribute all of the value that we put on Pansend to our R2 Dermatology and AI. You tweeted about this, this morning, but I think R2 is a super interesting business. It was founded by the founder of ZELTIQ CoolSculpt. That business was sold to Allergan for $2.4 billion. This business effectively does essentially skin toning, which is a $22 billion market. So, it's sort of more aesthetic. But it's sun spots, age spots, and toning them.
They also have a device in Asia that is a skin-lightening treatment, too. So, they have received FDA approval in the US earlier this year. The revenue in Q2 is very low for R2 because it literally just started selling these devices, but they're doing a lot of demos right now. You can follow them on Instagram and see how cool the technology is. We think growth in this business is going to be pretty significant as they start rolling out the machines to dermatologists’ office and they're in the process of getting approval in China in Q4. We are expected Q4 for Glacial Spa, Glacial RX, the device in China.
So, again, a super interesting business founded by Rox Anderson. It started as ZELTIQ CoolSculpt. Harvard dermatologist, very well known in the industry for being innovative. So, we think there's going to be an interesting value creation event that happens here in the next couple of years. So, we're excited for that because I think that point allows us to create some monetization of events that have not happened for so many years in this stock, which is why it's languished for so long, like you mentioned in your tweets this morning.
The third major business is HC2 broadcasting. That's one of the reasons I first started looking at this business because years and years ago the former CEO started buying all these broadcast stations. They were all, essentially, whitespace broadcast stations. So, what exactly is that? Your local Fox. I grew up in Hartford, Connecticut, and the local Fox 61 station was owned by Tribune, but even though it was a Fox station, it was a local broadcast. The local broadcast industry is, essentially, a particular company that has the spectrum, which is broadcast spectrum. No different than wireless spectrum, but FCC approved for very different use. So, that broadcast spectrum in that particular market and they broadcast signals from a tower to your bunny ears antenna. That's how the local news is watched and how you get local TV.
Now, the difference and then they're obviously paying fees to be the Fox Affiliates to parent Fox. They're getting commercial revenue from the local news and daytime broadcasting. The parent company, Fox, is getting sort of the advertising revenue from the primetime shows. What's so interesting and different about this business is that there is no local channel. So, if you take that Fox 61 station out of the channel, and it's effectively just a white space broadcast station that can be used for anything. That's what the former CEO started acquiring. So, they cover about 60% of the US population. They have about 230 broadcast stations and 90 US TV markets, and 34 of the Top 35 markets.
What they're looking to do here is really continue to lease these whitespace stations and generate some revenue from Carriage. Let's call it an OTT provider, streams its content over its device into urban and suburban households that have broadband connections. But if you're in a rural area, you have no way of streaming XYZ OTT service. This is, theoretically, a way for somebody in a rural area to have something like a tableau box or to have a broadcast antenna and to receive that content, they otherwise wouldn't be able to get in that way. So, that's one use of the spectrum. Then, we can talk in more detail because I know, and then we talked Friday about how this is potentially a really interesting business, but it has so many different use cases and the use cases are years out. One of the things the management says here is that for the time being they're going to lease content through this current business model.
There's a lot of versatility to whether or not the spectrum can be sold in a future broadcast auction or it can be leased out for 5G purposes, using ATSC 3.0 and I can get into more on that. But the point is: there's a lot of versatility in this business and there's a lot of value on the comm. I would say the same thing on some of the other Pansend Holdings. I won't get into them now because I think they are small, in terms of overall value. I think R2 is really the one to highlight, but there could be a huge upside to what R2 is doing alone.
Again, DBM, Infrastructure Bill, great acquisition they just made with Banker Steel. We think it covers the entire market cap and gives a significant upside on top of all these 3 options we have, in Pansend and broadcast. So, I'll stop there because I've been talking for a while.
Andrew: All right. Podcast is over. We covered every segment. No, no, that was a great coverage. I want to go deeper into each of the segments. I want to tie it together with valuation. I will say, we'll go to valuation but I will say the stock is a little under $4 per share right now. You just mentioned you think DBM alone covers the entire market cap and more. I mean, you mentioned this CoolSculpt. I don't have my model up. So, this is like a hundred-million-dollar market cap company, right? It might be 200 million. I can't remember off the top of my head, but you mentioned CoolSculpt on the healthcare side, which was R2's former business, sold for $2.5 billion. You can start doing the math. You're talking a couple hundred-million-dollar market cap where you mentioned DBM might be, R2 might be... Everyone should do their own diligence. This is very risky, but there are several moonshots in here that we've talked about. So, I guess I want to dive into segments, but let's just talk about like...
Look, we'll go into value in a second, but the management here, old management, Phil Falcone, very controversial investor. He's made fortunes. He's lost fortunes. He maybe hasn't always treated his shareholders like his partners. He's gone. The new management has come in. I think a big piece of your thesis, the thesis here is that new management is going to realize value.
So, I just want to take a second to stop and talk, have you talked about why do you think this new management team is going to realize value? You saw my tweet, so you might know what's coming, but I might have a little bit of pushback there.
Nitin: Okay, so I would say the first thing is, let me just talk about the history of the business under the previous CEO. In 2018, just as the capital markets were closing in December, they issued some very high-cost convertible debt. That's when the stock went from mid-5s down into the 3s and then it didn't really recover from there. It started to, with the activists coming in, and then COVID happened because the activist was sort of January, February 2020. Anyway, starting with that, you had that issue, you had very high corporate Opex. You had two floors in Park Avenue, for their headquarters. I don't need to go through the rest of that, anybody can take a look at Mike Korzenski, the Activists who stepped in here and Percy Rockdale is the vehicle he was using. Anybody can Google the presentation and take a look at the former CEO. What was involved here? What was happening? What I would tell you again, like I said before, that this piqued my interest in the spectrum business, is that I think that I've been a spectrum buff for a very long time, probably starting as early as 2007, 2008, and I still continue to think there's real value in Spectrum, even though prices have gone up, especially in a 5G world. We think about all the M2M, IOT, AI devices and just everything that's going to happen.
We have this positive feedback loop where more data enable the use of more networks, which enables more data back to the cloud and enables more and more machine learning. The reason I bring that up is because I think that Phil Falcone was a visionary, in a lot of ways, and he was very thoughtful in terms of some of the assets he put into what was HC2 at the time and is now Innovate. So that's why I got interested and excited. Again, stock languishing through 2019, the Activists step in, launches a proxy battle, a couple of other large shareholders step in, the now chairman also stepping in. They basically pushed the former CEO out. They then start to sell assets so they refinance some of the high-cost debt. Then they do a rights offering. They sell their insurance subsidiary, which I know you had questions on, and some or other non-core businesses they've sold.
Now, we get to this point where we have these 3 businesses. What's exciting about these 3 businesses right now is one, they did this banker deal, and I can get into that when we talk about valuation, but they did this banker deal in DBM. I think that was just a homerun deal, in terms of what they got, the time at which they got it, and the free cash flow it generates over time. Again, on the management front, I think, speaks to the DBM management, the team is very, very good. They've run this business really well and they've acquired it properly. I think that's exciting because you're going to generate significant free cash flow there. I think what's exciting about Transcend and especially Glacial Rx, is barring any funding that they do in some of the other smaller Holdings. I think, at least from our perspective and our estimates, were done with funding R2, and you would imagine that on your tweets, too. I think this is now self-funding, and I think, now it starts to grow. I think the value there to your point is that ZELTIQ CoolSculpt went public at a $25 to $30 million revenue level.
We could potentially see this go public and I know management is thinking about that. We could see this go public at that revenue level next year, in theory. Again, that's by our estimates. If this goes public with a $500/$600 million market cap and we own half of that company and we have no more funding to go through here, that's going to realize a lot of value when people just look through the mark to market. I don't think the company is going to spin the shares, anytime soon. I think they're going to wait for more value to build. But then by late 2022, 2023, as this really hits its stride, in terms of inflicting on revenue growth mark 2, we could potentially see distributions. Those distributions, again, could cover what we're paying for the stock right now. When you just think 77 million shares of data outstanding. If CoolSculpt got a billion-dollar market cap, R2 got a billion-dollar market cap, and we own half of that $500 million. Just do the math $500 million over 77 versus $3.85.
Andrew: R2, correct me if I'm wrong, because I read the Colson stuff, they're not the only investor here. There are other minority investors who have come in and put a--I can't remember what the mark is, but they put a serious mark on R2.
Nitin: Yes, and so Wadong is their other funding partner, it's Chinese, they funded some other Pansend Portfolio companies. They have pull on China, too. So, that's a lot of why they're pushing for regulatory approval in Q4. So, it's not just a passive investor here, it's somebody who actually has a presence on the ground in China and, especially, Glacial Spa could be a really big. Again, it doesn't necessarily go into their dermatologists' office. They can go into medi-spas. So, that's the kind of thing, because it's more aesthetic for skin whitening. That's the kind of thing that could grow gangbusters nature, too. Right? Especially given cultural bends towards that sort of product. The reason I bring that up, it's a long answer to your question, but the point is, I think Pansend has a great management team. I think DBM has a great management team, and they've shown us that they're doing the right things to build these businesses. I have consistent conversations with the CEO and CFO, with Mike Sena of HC2 or VATE and I think they're great operators, too. I think they're better stewards of this business than the previous management team.
Look, and then the last thing is really on the Spectrum side. I think the spectrum business, you see that in the last couple quarters, it went even more positive. They spent a lot of Capex on upgrading their infrastructure for ATSC 3.0, and I can get into, again, more detail on that technology, but the point is Capex is declining, their EBITDA, free cash flow positive. They will not be funding these 2 businesses anymore, so you're going to see them take dividends out of DBM and then they're going to use those dividends to pay the interest expense. They're going to refinance in the future. We're going to have a harvesting event, I think, on R2, at some point in 2022 and 2023, and then we're going to have a lot more color into just how big the Spectrum business can get, as we get closer to 5G deployment, autonomous cars, and so forth in '22, '23. We could even see a spin of that business to harness value.
The last thing is, if they decided to go that route, then you would just see a re-IPO of DBM. I'm not even saying every IPO, in terms of a new company, but change the name, get some sell side interest. I think we have been doing a 170 million inhibited in EBITDA in 2023 for DBM Standalone. With nine times EBITDA, there was CanAm, which is a competitor of theirs, the fabrication business was acquired at 12 times. So, at 9 times, 170 million in EBITDA gets you to $15 with each share. Right? So that's if they're able to harvest some of these other assets. Sell, spend, and send, do something in terms of monetization or spinning HC2 broadcasting once it gets bigger and standalone, or even sell to a larger broadcaster, and then you're left with a steel fabrication business that's revalued. This could be a $15 stock plus what you get from Pansend and Spectrum.
Andrew: We're going to come back to the management. But I can tell you want to talk about the segment. So, let's just dive into the segments right now. Let's start with broadcast because I think DBM is probably the core value driver here, but I think broadcast, in some ways, is the most interesting.
I mentioned there at the beginning that you and I probably spend a lot of our time in Telecom, so it's the one that I latch onto. With Spectrum, you can really put a big moat from the Spectrum, so let's just talk broadcast.
Broadcast, as you said, what they did is, Phil Falcone said, "Hey, the cheapest way to reach the entire nation is just go buy all these Channel 39 on your local TV station," right? Like, it's the broadcaster but it's not the Fox broadcaster. It's like the crappy little off-local news. Their New York City station they bought is Channel 34. I'm a cord-cutter, I don't know, but they bought it for a little over $2 million back in 2018, right? So, they buy it, but the thing is, you buy a broadcaster and anyone who can reach you gets access at OTA and there's actually been a little bit of cord over OTA over the air. You cord cut but then you get the bunny ears so that you can get all the local channels and you can still get the NFL and everything. So, they played on that cord.
Then the second area that they did was they said, "Hey, we'll buy all these OTA so we get nationwide coverage." Low bib will also have all the Spectrum and on the back end, on the Spectrum side, you said, "Maybe the Spectrum has a lot of value." So, do you want to start talking about the spectrum? Or do you want to talk about the business itself?
Nitin: I think the two works in tandem. Let me frame how I think about this. I think about this business is, as you have the rural US and then you have the urban US, and I think the business, and again, this is my view on the future, the next 5 years in the Spectrum business. I think the business bifurcates. I think what you end up with... We're invested in the company that has content, so they basically own a library of content and they have an OTT streaming service. One of the things for them is that they don't have broadcast channels, right? Like I was mentioning earlier, there are 20 to 25 million households in the US that's outside a deer slow copper or it's outside the broadband footprint totally.
You and I talked about EchoStar and that's really their sweet spot with their satellites. The problem is, you can't really stream on that because there's a finite amount of capacity and they actually throttle you, too, if you start to stream too much on it. There are all these households that can't access streaming content. So, partnering with a company that has a streaming service in those rural areas on these channels to say, "Look you're going to have to do your own marketing, but we'll lease the channel for you, we'll lease the channel for you for $0.20, $0.30, an eyeball." That's how they think about it, as just eyeballs that a single channel or a group of channels was exposed to. They go to the streaming service and they say, "Put your stuff on our channel. You're going to advertise for that channel so people who get the typical box or have a bunny ears antenna can go to that channel and watch the content." But the idea here is that there are very few people, if no one has open stations in rural areas that they can go to a-- Sorry, God.
Andrew: Can you give an example of a channel that has partnered with them? And then if I partner with you, it is typical cable-style watching where I have to watch what you're programming. I'm not going OTA streaming through this service. I can't go Netflix style and choose, like, "Right now, I want to watch 'You' and then I want to watch 'Squid Game'." Like I watch with their programming.
Nitin: Yes, and so it's no different than if you were to have a-- You have your Apple TV, right? In your Apple TV, one minute you're watching 'Squid Game', next minute, you're watching 'Succession'. So, when you're switching between apps on your Apple TV, it's no different here. You would just switch to the app that's then connected to your bunny ears antenna. So, that's really how you would watch some of that content.
Andrew: So, you would switch the app that connects your bunny ear antenna and you would just watch whatever is streaming on that channel?
Nitin: Yes. Well that you could you can switch between all the channels that are available, right? Because, in theory, your bunny ears antenna is going to get the local Fox channels, it's going to get the local NBC, CBS, ABC, and that goes to your point around cord-cutting. If you are a cord cutter, but you want local channels, what are you going to do? You're going to get one of these bunny ears antennas connected to your Apple TV, and then you're going to stream on them.
So, that's where they bring the substitute in for some of the cord-cutters. Again, they're not getting paid on you watching NBC, but when you buy that device and you stream, you have access to the channels you're going through the channels. If you find that you're in this rural area and you want to watch the Netflix, I don't know, Squid Game channel--and I'm not saying Netflix is doing a deal with them, or they've even talked about that. But Netflix doesn't deal with them, for those 10 million rural households. You go on the Squid Game Channel and you can basically watch episodes of that. It's going to be linear TV. It's going to be an episode after episode. You don't have to wait, but that's the key here. That's the value that they provide.
Andrew: Can you give an example of a streaming service that's worked with them?
Nitin: So, they're working with Scripts ION. They did that in Q2. They launched that for 47 of their stations, so they're effectively putting Scripts ION content on 47 of their channels. The other thing they mention here is, while they have 230 broadcast channels, there have been a lot of technological changes that actually improve the number of channels that they have per station, so they can effectively go and broadcast to 6 to 10 channels per station in a local area.
Again, you could argue well if there's a local church station, like, wouldn't they be able to go to Netflix and do something like that and compete with HC2 Broadcasting here? I would say no, because the whole value here, you know, they paid a little bit here and there for all these stations, but Falcone's quietly putting all of these together creates that scale. This is a business where scale is so valuable because you can then get all 20 million of those households, right? You're not going to 100,000 here or 400,000 there.
Andrew: Let me provide my two pushbacks. I looked at this a couple of years ago and it was the related party deals in the management company. [crosstalk]
Nitin: Can I stay on broadcast? Do you mind if I just get into the other side, the urban areas really quickly?
Andrew: Oh, yeah. Talk to urban areas and then I'll give you my-- [crosstalk]
Nitin: I'm so sorry. I'm just going to say they're bifurcated. You have these rural areas where I think this will stay a channel that releases content, and in the urban areas, I think that's where you have the Spectrum crunch in 5G. I think, in that Spectrum crunch, one thing you can do with ATSC 3.0 is we use new broadcast towers and these new antennas that they've spent the Capex on to broadcast from a single knock they have. It will enable them to actually take content and distribute that to IOT devices with an antenna for the broadcast signal.
So, if you have an autonomous car and-- I don't have the stats in front of me, but you could look at so many former intel, so many people have said that if you just look at the amount of data that an autonomous car absorbs to work, it's just mind-numbing. They can utilize their spectrum and wholesale it out in urban areas. All the car needs is an antenna for ATSC 3.0 for the broadcast channel in its other Qualcomm, RF antennas.
You can effectively take content and then you can distribute that to all of these cars. So, that's something that will be hugely valuable in the 5G world, too. So, I see that business as bifurcating. I think you have this lease-to-carrier type model in urban areas and then you have the lease-to-the-content-providers in the more rural areas.
Andrew: So, let's go back to the rural area. So, I want to provide two pushbacks here. I think the first pushback would be 20 to 25 million urban areas that are using OTAs to get content because they don't have great internet, so they can't stream. So, the first pushback would be: you're a cable bull, I'm a cable bull, we follow this. There is a huge push to end the digital divide. Right? You're seeing huge subsidies. Every other day. We see a Royal Telecom come out and say, "Hey, we're investing hundreds of millions of dollars over the next five years to upgrade our old copper into fiber that obviously won't cover the super, super rural areas, but you're also getting satellites launching, Starlink's coming out with the product."
So, my first pushback would be "Hey, that 20 million is going to shrink a lot over time because there's just such a big push. Whether it's the company's economic incentives themselves or just the infrastructure bill just pushing money to close that digital gap." So, the 20 million is going to shrink would be number one.
Then my second pushback would be okay, even if you assume the 20 million is going to stay and everybody's going to watch OTA. You and I, we followed the cable sector and the telecom sector for a long time. The long tail of channels, they're just not that valuable because people, it turns out, they just want to watch football and they want to watch the big buzzy shows.
The only big network that ever launched successfully was really Fox. How many times did we hear-- You mentioned Scripts ION, they were going to do...? I don't think it was ION, WGN-TV was going to become the sixth superstation or whatever, right? It just doesn't work because there's just a little bit of a network effect. You always watch this channel, your friends watch this channel, all the sports on that channel because everybody watch that, they had the economics to pay for better shows.
Those would be my two pushbacks. So, I'll let you dress either of them.
Nitin: So, the first thing I would say on the first pushback is, if you look at where Frontier, Windstream, Consolidated Communications, most of where they're looking to launch fiber to the home is where 1) they already have some sort of DSL network with decent broadband coverage to, 2) they are looking to launch in areas where the cable companies already have service. It's effectively a cable monopoly in more suburban areas. They want to turn it into a duopoly. They want to take 30% market share and they can really make the economics work at that.
So, what I would say is there was an FCC study that I remember waiting years and years ago, I think it was done like 2010 or 2011, it was BNN. It was something that I read to get more comfortable with an investment in EchoStar, which we came and talked about Friday. What it was essentially saying was that there are these, basically, 10, 15 million households in the US that are so rural that there is no talk of even putting anything, any sort of 80-watt fiber would be what, $10,- $12,- $15,000 to wire out to these types of homes. I think the point is if you want to wire a million of those, at $10,000, you're already talking like 10 to 12 billion. What's the amount of your mark in the infrastructure bill, which is sort of the largest spend ever done on something like this is 22 billion, assuming that the current bill passes maybe '24.
The point is, how many households are you going to be able to connect at that level? A million? Maybe. Especially when you're spending so much at connecting, creating duopolies in these monopoly cable market. The point I would mention is that there is this untapped level of these households. I think there's enough of them that a business that's super rural like this, it's the reason why DTV and Dish still have satellite video businesses. It's because you just can't get anything to these households, they're so rural. So, that's the first thing, I would say.
The second thing and your second point, I would say is really that content is key, at the end of the day. If you have crappy content, you are not going to be able to sell it. You could have crappy morning PBS content, and nobody watches that, there's a reason why PBS-- That's a bad example because it's public broadcasting. But the point is, you have crappy content, nobody's going to watch it. But if you have a network like this in this kind of scale, and you can reach those rural households, and you can go to somebody who has Squid Game and you can say, "Put that content out to these households because it's the only way you're basically going to be able to approach them." Then you have that quality of content. Again, I'm not saying that's happening, but I'm saying that's some of the potential in this asset.
The other thing to say, too, is that if you look at these Top 34 of the Top 35 markets and where they own stations. You tweeted about this, too, and I agree, I think another broadcast spectrum auction is a long way away, but you don't need much for this to work and for this to actually generate $300 million, $500 million in value for HC2, which is several dollars per share. All you really need is just some of the stuff to work. You get a couple large OTT streaming services, leasing stations, you get a couple big in these 34 markets.
Let's say, we're talking about NFL cities. So, you're talking about their Top 10. We value the Spectrum in the Top 10 and we valued it $0.40 a megahertz pop. You get to $700 million in value.
Andrew: I'm just going to dive in with some questions on Spectrum. For this, if you don't know, there was a Spectrum broadcast auction in 2016 and what the Spectrum broadcast auction was, look, your big local broadcasters, your Techno, your Nexstar, it's CBS-owned, your local station is CBS. They'd say, "Hey, we've always streamed our things." I believe most broadcasters are in the 600 to 700 megahertz. They'd say, "We always streamed. At this point, technology has improved, a lot of our stuff goes over cable, maybe we don't need as much." The FCC said, "Okay, great. Auction it off, right? If you don't need it, tell us, we'll sell it, we'll take a cut. We'll sell it to the big wireless players who do need that spectrum." That went for a nice number.
So, my pushback, why don't you just tell us: what was the dollar per megahertz pop that's a similar spectrum to what H2C now owns across the country went for back in 2016?
Nitin: About $1 a megahertz pop, but that was nationwide. Only about half of that, I believe, went to the broadcasters themselves. The rest went to the government, to clear the stations, and to pay for all that clearing. Or $0.50, $0.60 a megahertz pop, but one other point on that, what I would say is that when I look back at something like the AWS auction, which is a higher frequency into your earlier point; higher frequencies to a certain level are more valuable. That was $2.00 a megahertz pop; $2.20 a megahertz pop for that auction. But when I look at that auction, the New York City stations went for like $8.00 a megahertz pop.
The point here is that big cities, where populations are dense and there are a lot of people using their phones, all in a small area, they need more spectrum. So, there are more spectrum crunches in those areas. So, I think you get more than $0.30 to $0.40 to $0.50 a megahertz pop in those areas, but, for the sake of argument, we're putting that number on their Top 10 and we get $500-$600 million.
Andrew: Okay, which, again, covers the market cap. Now, there's that associated with it and there's holding their subsidiary that covers the market cap. I'll give one more pushback because, you're right, spectrum covers the power, all right. Spectrum in New York City, more valuable than spectrum in rural Montana. Entire band spectrum in New York City, way more value than a higher band spectrum in rural Montana. For those who don't know, higher band spectrum can carry more data. It's better for data-intensive applications, like 5G, but it can't propagate through walls very well and it can only go very short distances. Right? So, 600 megahertz might be able to travel 10 miles, a radio station can travel 10 miles. 500 megahertz might be able to travel 100 meters, or something. I'm doing rough math, but you can tell me if you screw it in the fan.
My pushback on the HCC spectrum was: 2016 was a different time. You have seen a trend towards the carrier. I think they have enough. Broadcast spectrum would qualify as low-band. I don't think I see carriers really fighting for low-band spectrum anymore. You see them really pushing for the high band spectrum because they've got 3G, they've got enough to carry base layer voice and text. What they really need is higher-band data in the urban met markets so that they can cover the really dated intensive stuff. Maybe it's fixed wireless, maybe it's just AR as you're walking around.
They already bought the broadcast spectrum that's similar to this. Do they really need more 600 base layers? It would be my pushback here. I feel like they've just got enough.
Nitin: What I would say is that all spectrum is valuable in urban areas. You look at what's called carrier aggregation, that's something that Qualcomm's been working on. What that essentially is the ability to take lots of different spectrum bands and pool them together into channels. Then you can get more spectrum bands in an antenna and you get more data through lots of different spectrum bands.
Part of the reason of your point is that 2 gigahertz spectrum is more valuable in 5G world than 600 megahertz is because of propagation. Like you said, in urban areas that propagation doesn't quite matter as much; you can get 2 gigahertz and you can go a couple miles and that's fine because it has the wider channels. Wider channel means you can transmit more data through it. But what I would say is that 600 still has value. Yeah, maybe it's not $7.00, $8.00 a megahertz a pop, but it has real value because you can push it with that carrier aggregation. You can effectively add it to the phone and it's just an additional way that you can keep transmitting more data to your customers who are going to be watching 4K videos while walking down the street in urban areas. Or your autonomous cars that are all going to be linked to the wireless network.
So, I would say all spectrum is valuable in urban areas. But yes, you're right. It's not getting the same price per megahertz pop, but, again, it just goes back to the fact that even if you get $0.50, $0.60, $1.00, they would be a home run for the stock.
Andrew: I just want to clarify one more point here. This spectrum, I guess, theoretically, if Verizon came and bought all of HCC, Verizon could probably go redo the license on this. But this spectrum, if you really wanted to monetize it, you'd need to have another broadcast auction. I don't think any are on the horizon. So, you're probably talking at minimum 5 to 7 years away. I do think we'll have another broadcast auction, at some point. This is not a near-term thing. As you said, it could cover the whole market cap. So, even if it's 7 or 10 years away, if it covers the whole market cap, everything's great.
Just to baseline everyone's expectation, we're not talking there's going to be a Spectrum auction tomorrow when you're going to realize this value.
Nitin: What I would say is the Spectrum auctions gives us where substitutes value the Spectrum, which is a proxy for wholesale. I think that's where the company is leaning in urban markets, with what's going on with ATSC 3.0. You can wholesale this spectrum to a carrier, so you don't need to have any sort of an auction to happen. Like I was saying, you have the one-way transmission of the data through the ATSC broadcast tower. I think that's where they get 5G value earlier than another potential broadcast auction. If that makes sense.
Andrew: Perfect. We can honestly talk spectrum and broadcast all day, but we're already in pretty good, and I want to be able to talk about management and some of the parts. So, let's move on to one of the other segments.
Why don't you go to DBM? I think we do this pretty quickly because DBM, it's not like it's a super-intensive business, super crazy, complicated. They actually are publicly traded. There's like a little stub remaining from the takeout years ago. I think it's DBMG, is what the trades under, but that's hyper illiquid. Everybody should be very careful there.
Just on DBM, they construct it. The Clippers are building their new Arena. They're going to fabricate and construct the steel for that Arena. My question there would be... When I hear that my first thing is, "Oh, that's a commodity business. It probably deserves to trade for basically the value of their net assets." They're not going to be able to earn excess profits over time. That would be my first thing, and I'll just let you tell me why I am wrong; why this business can actually earn a little bit of economic profit. Profits above the cost of capital.
Nitin: Again, this is a localized business, too. There are very few people in the country and even fewer in their markets, who can take on these sorts of projects. That's why they get a margin on them. So, one of the things you saw in COVID was these large-scale projects just ceased, they stopped. These guys, HC2, in Q1, Q2, they were getting something like a 6% to 7% EBITDA margin. Historically, they've been in the 10% to 12% range. Now that some of these large-scale projects are coming back, you see that the large-scale projects really give them quite a large margin. They also have design capabilities, so they bought a design business, Upright Wolf. So, all there is that they're soup to nuts on designing, building, and fabricating a steel structure. There really is a lot of know-how to that and there's a lot of history. No new steel fabricators are really being started right now.
So, I actually do think it is a pretty good business. Look, to your point, it has, historically, been acyclical. I think things are changing with some of these secular trends related to on-shoring and reinvigorating the grid, building some of these fabrication facilities in the US, what's happening with the infrastructure bill. I think, all of that makes the case for non-residential construction and infrastructure-related construction spending greater. I think that gives them a multi-year tailwind.
This is a business that's been generating significant free cash flow pretty much forever. It's a business that's existed for a very long time; it's a business where their secret sauce is, again, the scale that they have.
Andrew: If you don't know, that's completely fine, but the Clippers' new stadium that they won the award for, how many people do you think could bid on that type of thing?
Nitin: From what we understand, and again, we've spoken to experts in the fabrication industry that's one of our own fabricators and copper smelting plants, and so forth. We think that it's just very, very few.
Andrew: Okay. So, it's big and it's lumpy and, obviously, it's not like there's a Clipper Stadium getting built every month. But when they go bid on it, in my mind, I was thinking, maybe there's 5 to 7 firms that could potentially bid on that business. When you talk 5 to 7 firms, that's local gobbly UR. It might be a little cyclical, but you are probably going to earn economic profits. Am I thinking about that correctly?
Nitin: Yeah, and look our compliance doesn't let me to mention an exact number, in case we're wrong, but I believe the numbers around the numbers you mentioned are correct. Think about what they're doing: Rams, Facebook, JPMorgan building, one of the fabrication facilities, one of the semiconductor fabrication facilities out west, the Apple Headquarters, Clippers. Many of the large-scale projects that are being built right now, or being done by them, I would say one, and I would say they acquired a company called Mountain State Steel two years ago now. They do a lot of infrastructures--roads, buildings, bridges, dams. A lot of that work, they have the capability to price a little bit of the infrastructure.
Andrew: It's still a publicly-traded company. It's super thinly traded. It relates to the take-out that they did a few years ago, but when they did the take out a few years ago, a) I remember tons of shareholders were screaming at the takeout was way too cheap. Do you remember what multiple that they took the company over a couple years ago at?
Nitin: I have it, but I don't have the number. I believe it was a mid-single-digit multiple, [crosstalk] but I can resend you the exact number.
Andrew: Yeah, no big deal. In my head, I think it was under 6 times and I remember people were very upset because they were arguing many of the same things. They were like, "Tailwind's behind them." "This is way too cheap." "This is a little bit of oligopoly," but I think there were some weird dynamics around the bid. I was just wondering.
Let's just turn over to healthcare. You actually gave a very lengthy description of R2 earlier. So, we don't have to talk too much about it. My first pushback on R2 would be, "Hey, this is by the people who made CoolSculpt. Sounds great, aesthetics." When I looked at it, I'm not a health care expert... Every now and then people watch the podcast and they'll send me a message and be like, "Hey, man. Love the podcast, but you don't look that great. Is everything okay?" I'm like, "Wow. Thank you, sir." [crosstalk] So, maybe my skincare isn't up to date.
Nitin: You will never get that from me.
Andrew: CoolSculpt, right? It's already in a bunch of doctors' offices, a bunch of plastic surgeons' offices. What's the difference between R2 and CoolSculpt? Why is this going to go supplant the thing that's already in a bunch of doctors' offices?
Nitin: So, different use case, similar technology. Similar IP around that technology that they have, but different use case. CoolSculpt is, effectively, a non-invasive version of liposuction where you're freezing the fat cells, creating what CoolSculpt does. This is a little different in that it's sunspots and age spots. So, you're essentially basically freezing the skin cells to get rid of these spots. I would recommend it, or you can even link it to Twitter, the Instagram handle for those guys. You'll see just what the before and after is. Again, when we talk about general checks that we do... We talked to a dermatologist, and it's funny because a couple of the dermatologists joked with me. They laughed that there would be no innovation in the Dermatology industry if it weren't for Rox Anderson because he's such a thoughtful, smart, innovative entrepreneur.
They think that this is going to be as valuable, as successful as what they've seen over the last 15 years with CoolSculpt. That's really the value here--it's a different use case, but it's people who already have experience with CoolSculpt. They have already used it; it's already rolled out.
It's interesting because the CEO of R2, ZELTIQ, for a number of years. Same thing with the VA, if you looked at LinkedIn. Bios of a lot of the people who work for R2, they were all at Celtic.
At least everyone I've talked to has looked at this as ZELTIQ 2.0, but, again, it's a different use case. As you start to see Glacial Spa, which is the skin lightening treatment and I think that's culturally valuable in some other countries, that rolls out medi-spas, there's value to that product, too. Now, it's more lightening the skin rather than freezing the age spots and sun spots.
Andrew: Because this is not FDA approved, I don't believe, I think they think it's all-- [crosstalk]
Nitin: It is.
Andrew: What's the path and timeline to FDA approval?
Nitin: So, it is FDA approved for Glacial Rx. They did $1.5 million, $2 million in Redman[?]. 1.7 last quarter. So, it basically just got approved this year. You haven't seen a real roll out there. I know they're doing their big New York City demo in mid-November. They're doing demos again, if you follow them, you can see that they're doing demos around the country with doctors' offices. I think in the next 2-3 quarters, you start to see sales ram. Similar to ZELTIQ CoolSculpt, they're doing the leasing model to where offices can lease the system; pay the lease and get paid as they're doing treatments.
Andrew: Both VATE and the Chinese partner put money in earlier this year. What was the valuation of the money that they put in?
Nitin: The valuation was, I believe, under 100 million. I don't have the exact number offhand.
Andrew: They put in 50 million and I think their partner put in 10 or 15 million, as well.
Nitin: Yes. They put in 15 million, VATE did. Okay, again not coming from the company, I believe and I get the impression that they're done funding this business. So, now you're effectively going to see, I mean, obviously, their only Opex cost is really the salesforce. They've already started building that and growing that. They really are just going to start leasing these devices, selling the devices outright. I think that happens at pretty high incremental margins. I think that's when you start to see the business inflect. Again, 25 to 30 million in revenue is where they can IPO, just like they did with ZELTIQ. It’s a ZELTIQ $2.4 billion game.
Andrew: We're literally at the inflection point, is basically your thesis in R2. That's perfect. Again, the IPO, let's call it a billion, their stake will be 500 million or so. It's going to cover the entire market cap and the debt of this company, in this case.
Nitin: Even if they don't IPO with that value, I think it gets their overtime. So, go.
Andrew: Let's go put it all together. We've said, I think 4 times, this segment covers all the value of the company. Let's just walk through your base case--how you value each segment; how that would come up per share. There is the corporate expense, there is corporate debt. We can take the corporate debt out and come out with a base case and you can do range, however, you want it.
But let's just talk about stocks at 370, 380 right now. What do you think the sum of the parts here is worth?
Nitin: So, when we look at the DBM next 12 months backlog, that's about 907 million. When we extrapolate what MTM backlog usually results in in revenue, a year out, if that make sense. It's about a 65%, 70% coverage of revenue. So, that would imply 1.3 billion in revenue 12 months out for DBM, Chef Banker. We think that that's going to grow high single digits. That gets us to 1.4 billion or so for 2023. I'm being conservative with margins, I'm looking at 12% EBITDA margins, I think that the backlog is growing at higher margins, from what I understand. That gets us to put a 9x multiple on that. That gets us to 1.5 billion. Like you said, they don't fully own it, there’s debt on it.
That gets HC2 stake or VATE stake to 1.2 billion there. 1.2 billion over 77 million shares, not including Holdco debt, gets you to about $15.00 per share and value. That's at 9x the value.
Andrew: Let's fast forward, how much Holdco debt per share is there here?
Nitin: The Holdco debt per share is something like $5.00 per share.
Andrew: So, just to break it down, not investment advice, but you just said $15.00 per share for DBM. If we took out the $5.00 per share, that would be $10.00 per share. So, right there, we've got more than double on the share price, we've covered all the debt, and we've still got 2 segments outstanding.
Nitin: Again, like we’ve talked about, being Malone Buffio always says, “Businesses are often worth more dead than they are alive.” So, we're putting a 9x multiple on this business, but they could easily sell for 11x or 12x. If you were in that situation, where you sell for 12x, if they want to fold the business up, they want to harvest the assets, self or 12x, and pay off the Holdco debt, you get a lot more value than even $15.00.
Andrew: One thing that shook me, I'm doing the math in my head right now, but you said 9x EBITDA. Even if you believe this was a 6x or 7x EBITDA business, there's still plenty of wiggle room in the numbers you just presented, where it would cover the debt, it would cover the market cap here. Once you start going below 6 times EBITDA, you’re kind of saying like, “Hey guys, interest rates are still pretty close to zero like nothing goes for below 6 times EBITDA anymore, unless it's a dying business with environmental liabilities, or something."
I'm just throwing that out there to say it's not like you threw out a super high multiple just to get there. We can get more conservative and still get to the same place.
Nitin: Look, the other point I would add is if you're talking about somewhere between 2% and 4% in Capex as a percentage of revenue, you take that Capex out, you're still at a pretty decent free cash flow margin. Your free cash flow margin, if you're talking about 6x EBITDA, what are you talking about on free cash flow? Yeah. Same thing. Maybe single digits. I put at least 10x or 12x free cash flow on a business like this.
Andrew: Just to stroke your ego one more time, that's a great point because, again, when you say 10% EBITDA margins, they're building giant steel buildings. The first thing that jumps shred is, “Oh, this is probably really Capex-heavy, so maybe it’s 10% EBITDA margins, but the free cash flow margins only come out to 1%.” You know, you need to lower. No. It's 10% EBITDA margins, the free cash flow margins are 7% or 8%. So, if it's 5 times EBITDA, it's still a very high free cash flow multiple. So, that's pretty rare.
Nitin: The only other message, just really quickly, on that is that they are cost-plus contracts. So, when we look at the crazy commodity volatility we've seen this year, they're not taking that commodity risk. That was something I needed to get really comfortable with here. Just given what we're seeing with the steel prices.
Andrew: You are talking to a man who has been hit by cost overruns, one too many times, so I'm glad you said that. Let's turn over to R2. I think we mentioned the IPO, but there's more than R2 there. Just how are you valuing the healthcare segment?
Nitin: I'm honestly not valuating any of these businesses anything beyond what we're putting on R2. So, Meta Beacon, the next most promising one. They're starting their US pivotal study in Q4, global pivotal study 2022. Maybe there's a monetization event, 2024 or later, but it goes back to your point and some of the stuff we were talking about earlier. I don't think that you can really assume that we're going to get any value out of any of these other businesses in the list unless they sell the entire portfolio.
When you look at Meta Beacon, GenEval, and Triple Ring, to the other investments, they put something like 30, 32 million into those businesses. So, if you want to value them if you can assume they can sell them at invested capital; if you want to assume that they get $0.75 a share, again, that's still a quarter of equity value on those businesses, not assuming there's any future values.
Andrew: Perfect. Perfect. How are you valuing broadcast?
Nitin: So, broadcast, I think is to your point, there's a lot of different ways you can value broadcast, but the way I'm thinking about it is, "What's my proxy for valuation?" Yes, I don't think a spectrum auction happens anytime soon, but even if we were to take the Top 10 markets and don't take any of the other markets, and value them at $0.30, $0.40 a megahertz pop, I get $500, $600 million in value.
Again, they're in 34 of the Top 35 markets and then they have another 90 markets on top of that, or short of the 90 total. So, you another 60-fiber call, on top of that. Think about that and you just think about if we're only valuing the Top 10, we're not valuing the rural areas, we're not valuing any of the semi-urban suburban areas. We're talking about $7.00 a share. I really do think, 3 years out, you're going to see what they're doing with ATSC 3.0 in the leasing and what they could potentially do in the rural areas with leasing out channels to content providers. You read well above that.
For the sake of argument, being conservative, $7.00 a share.
Andrew: Doing the math from memory, $15.00 a share for DBM, around $7.00 per share for medical, around $7.00 per share for broadcast. Put it all together that gets us-- Let's just round it up to $30.00 per share. We're going to take off $5.00 per share for Holdco debt. There's also Holdco corporate expenses which, how would you strike $3.00, $4.00 per share from that?
Nitin: Yeah, you're right. So, basically, we look at 3 years of Opex and we value that upfront at another $30 million or $0.40 a share. So, take out $0.40 cents more on top of that, you're at $24.00, right?
Andrew: Okay, so we'll call it. $24.00 versus a $4.00 share price, people can see why it's so exciting. It's one of the higher acting businesses, so I think we've talked about it a lot. I just want to turn to the first question, which we kind of got away from. A big question here. This was the question at the old HCC, like a Falcone visionary, I think. I don't know if he had shareholders' best interest at heart. A new management team comes in, Activist comes in, they change up. Very dramatic. I think the biggest pushback here would be, "Is management the right people to realize value?"
I can go through a bunch of things, but the two things that jumped out to me are number one: at the beginning of the year, they sold their insurance segment for, I can't remember the exact terms, but they sold it to the director, who was in Activist, who replaced the Board. They sold it to him. He did an inbound to the company, said, "I'd like to buy the insurance segment," and they ended up selling it to him. That’s a mammoth red flag. Selling to a director is a big deal. Big subsidiaries.
The second thing is, last year they did a rights offering and they had Abi Glacier, who was the Chairman, he partially backs up the rights offering and he got, I would say, preferential preferred shares for backstopping the rights offering. So, that's two related-party deals. I look at that and say, "Oh, yikes, it's kind of the same thing that was keeping me away, to begin with." So, how would you respond to that?
Nitin: So, I would say two things. I would say, one, on the asset sale, the insurance business, I think the insurance business was a mess. I think I have a lot of respect for Mike. I think he understands insurance well, but I don't think this was a great fit within HC2. There were also debates. So, there were also a lot of issues with the previous CEO and his ability to run an insurance book. The fact that he was running it, given some of the stains on him beforehand, I think those are a couple of the issues for the divestiture. I know they ran an open process.
The other thing to keep in mind is this isn't just sort of a plain vanilla insurance book. This was long-term car insurance. We see what happened with GE in that business. We see what Atna [crosstalk] did with their business. This has been a mess. Taking this off the balance sheets, selling it at a time when the market was valuing this business like they were going bankrupt, I think helped them short the balance sheet and help them do that refinancing that they did in early 2021. I think the rights offering and that's a segue to the rights offering.
This was a business that was left for dead. It had really high-cost debt. The ability for management to refinance and get it to that next stage where dividends from DBM to Holdco were paying off interest expense, as they were looking to put more money into R2 and as they were looking to get Spectrum self-funding, require doing something like these rights offering.
One person showed up. I'm sure if any of the other large will appear soon. The other thing to mention is that there were a couple other thirteen defilers, some sort of in Falcone's court, like Mike pushing to take the lab of the company. They could have all stepped in and backstopped.
So, there were a number of large holders here. I just think they did at the time what they needed to do to get the business in the right spot, to do that refinancing, and to now harvest all this value.
Andrew: On long-term insurance, just to give people an idea of how big a mess the long-term insurance has been. Have you looked at Genworth recently?
Nitin: No.
Andrew: I spent some time looking at them recently and I'll tell everyone. So, Genworth share price is $4.50 per share. They just IPO their mortgage. It's their mortgage insurer, Enact. At today's share price, Genworth owns almost $6.00 per share of Enact shares because they only IPOed 19% of it. They retained 81% of it.
So, $4.50 per share, they own $6.00 of Enact, and then outside of that, they have $22.00 per share in book value from their US long-term insurance segment. So, you can see the steerer's price is $4.50, they $6.00 of Enact and, allegedly, they have $22.00 of long-term insurance value there. The market clearly doesn't think the mark's right there, right? They think there's a lot of value that's going to get sucked out as they continue to pay liability. So, just to let everybody know how big of a disaster those segments are.
So, we mentioned the rights offering. I want to spend one more second on the Chairman because I think he's pretty much in control now, right here it's over 30% of the stock after the backstop and everything. Do you want to go into any of his background or anything? Because I treated this out a little bit, joking. Man, new stock hasn't exactly performed great underhand. I believe his father was a billionaire who really built his empire. So, when I see him running the business and man, he was not that great under him. James Dolan, MSG, things pop into my head. Red flags, thoughts ahead. Do you want to address him a little bit?
Nitin: Yeah. All I can say is that my father-in-law was Chairman of Tottenham Hotspur. [crosstalk]
Andrew: No way!
Nitin: We're Tottenham family. Anything Man U does, I'm not going to say anything positive about it. Anyway, from what I understand, he is a well-respected businessman, he's thoughtful, he does the right thing by, you know, people do business with them, but that's all I would add on that. Overall, I think just one thing to step back here and say is that for us at Papyrus, overall, every company we invest in, we think has a really good management team. Again, very small, stub position in HC2 back when Phil Falcone is running it because I thought he was a visionary, but I had trouble with some of the issues that the Activists communicated. So, it was never large, but at the end of the day, when we take the position, we're "diligence-ing" the management team, we're getting to know them, in this case, it's Wayne and Mike, the CEO and CFO and getting comfortable with them.
I don't see too much here that I am cautious about, in terms of the management and the Board. The one thing I would mention is that the company just put a rights offering in place to protect the NOL that they have. So, they have about 100 million usable NOLs and they have 175 million in IRC carry forward. So, I do think section 163.
I do think that management now has an incentive to really monetize the business because it's not like they can really be buying, especially members of the Board, who own a lot of stuff can really be stepping in here and buying much more, which I think, again, puts an impetus in place to really monetize this business.
Andrew: Let's end there. So, we've gone through the sum of the parts. We've gone through each of the business segments. We've gone through management alignment. I think you mentioned management is buying shares on the open market and they own a lot of shares, which is always nice. You've got three disparate businesses: broadcast, startup healthcare, steel fabricator. How do you see this playing out? Are they just going to be a bunch of spinouts? Are they going to sell a big segment or IPO, R2, and then spin that out? How do you see this playing out in the end game?
Nitin: I really think that this is going to be something like we're going to see an IPO of R2 in 2022. On top of that, we're going to see some sort of a spin over time of R2. It might not be upfront, but in 2022, 2023 the shareholders, and I think we really get a lot of our sort of cost-basis out and we get R2 shares spun to us. Then, I think there's going to be something like continued leasing of the spectrum through ATSC 3.0 and through 5G. I think you'll see more of a windfall of free cash flow in the spectrum business. Maybe that's a prelude to spinning or selling Spectrum, or monetization of substations through, again, like a broadcast option. We've talked about that's years and years away. So, I think it's more a sale of the potential business or to continue free cash flow generation there.
I think you really see something like a potential name change in a few years to DBM so people can really see and they can highlight the value in this business. I think in that time, they have some debt that they're going to pay off at DBM, a sort of sellers' notes, and so forth. So, I think you'll see some debt paid down at DBM and then the overall debt picture of Holdco plus DBM looks a lot better and I think people just put more value on this day. I think that's when you get to a higher stock price for the current VATE.
Andrew: So, if you and I are doing a podcast 5 years from now, and we're talking about your new name, and I say, at the end. "Hey, let's just follow up on VATE." I think what you're saying is you'll think Stature Mull have been spun off or sold, R2 would have been spun off and sold, and this business, it seems like DBM will be the core. They'll probably have rebranded as DBM and it'll just be a pure-play, play on DBM and everything else who was spun off. You're talking lots of events in special sits there, in the meantime, which unlock huge value if the numbers you walk through are to be believed, but that's kind of how you see it playing out?
Nitin: Yeah. Again, in these special situations, especially in the market right now, you really need to see past the monetization and you need to see a business turning into an actual cash flow yielding operating business. Again, I'm not a member of the management team or the Board, so I don't know what they're going to do. But this is what I see as the best way to monetize. I know they're going to work in the best interest of shareholders, so I think this is the way they move.
When I say, in terms of levels of certainty, I'm very, very certain that an R2 type IPO happens. I think that realizes a ton of value here.
Andrew: You know what the other most important capitals that you did not mention is? The Bucks. Tom Brady, the quarterback, maybe going to the Superbowl again, Raymond James Stadium, is where they play. That was built in the late '90s. So, we're starting to come up on the time where the Bucks need a new stadium and I think I know a steel contractor. Oh, obviously. The chairman owns the Bucks, as well. I think I know a steel contractor who might be in line for getting a Big Bucks Stadium. Do they cover South Florida?
Nitin: I believe the Banker Business does. Yeah. [crosstalk]
Andrew: There we go. There we go. Cool. Well, hey, this has been great. We've gone over an hour at this point. So, it's probably time to wrap it up, but I would always want to give you the last word. Anything we didn't hit on that; you wish we had hit on. Anything that we kind of touched on that you wish we could hit a little harder. Just any lingering last thoughts?
Nitin: No, I think this is a really incredible story. We're at a point where we know why the stock is in the doldrums, right? Why is it misvalued? It's had this mess of a history. Like you said, it's been a widow maker for so many small-cap investors, but I think we're at the point where we're self-funding in some of these businesses.
I think Spectrum hits its inflection point in 5G. I think DBM has been doing some really cool stuff and we're just at this inflection of the infrastructure bill. I think same thing with R2. When you start rolling this thing out, people will see the power of it, the value of the product. So, we're at this very cool inflection point in all three of these businesses. I think the next few years is going to generate a ton of value. I would leave it with that.
Andrew: Perfect. Hey, I'll leave it there. I'll just remind everyone: this podcast is not investing advice. Nitin's going to send me some additional disclaimers. Those are going to be in the show notes. If you want to see some of those Twitter links that we talked about all, including a link to my Twitter notes and questions on VATE, as well.
Nitin, this has been great. Thank you for coming on and pitching such an interesting company and looking forward to having you on for the second one.
Nitin: Thank you. Thanks for having me and I really appreciate it. Thanks for all the incredible questions.
Andrew: Thanks, man. Talk to you soon.
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