Sniffing out Special Situations: Bad Dog…..

We have a dog.  He sniffs a lot.  I don’t know what he is looking for.  He knows where his food is, why does he spend so much time sniffing?  Sometimes I feel like my dog, sniffing a lot when it is pretty obvious where the food is (great businesses at good prices in times of market fear–general or industry specific).  What follows is a description of my sniffing, in other words, wasting my time.  I write to encourage you not to sniff.  

There is an odd company in the U.S. with only one remaining asset in Brazil (wireless spectrum).  They put out an 8-k back in December stating the following:

(e) As previously disclosed by NII Holdings, Inc. (the “Company”), the Board of Directors has approved a restructuring of the Company to further streamline expenses by shifting the costs and associated responsibilities from the Company’s headquarters in Reston, Virginia to its operating subsidiary in Brazil, and while the Company is focused on effectively managing its business in Brazil, the Company is also considering potential strategic alternatives with third parties. Also as previously disclosed, the Board of Directors approved a Form of Separation and Release Agreement (the “Agreement”) for certain executive officers of the Company. The Agreements, which are expected to be executed by these officers in the event of their termination of employment with the Company, were provided to the officers on November 13, 2015. On December 21, 2016, in connection with the approval of the Company’s 2017 budget, the Agreement with Steven M. Shindler, Chief Executive Officer, was updated to provide for a target termination date of April 1, 2017, and the Agreements with Daniel F. Freiman, Chief Financial Officer, and Shana C. Smith, General Counsel, were updated to provide for a target termination date of July 1, 2017, but when termination will occur has not been determined.

This is an odd agreement.  It appears that the company is telegraphing the date of its eventual sale.  Charlie479 (who is a rather famous investor) wrote up NIHD in 2002.  The stock went up over 25x before ultimately filing for bankruptcy in 2014.  It emerged from bankruptcy and began to slowly sell its remaining assets.  The company is down to its final asset, wireless spectrum in Brazil and appears poised to sell this.  What’s the spectrum worth?  After spending way too much time sniffing, I have concluded that I have no idea what the wireless spectrum is, let alone what it is worth.  800 mhz, 2.4gbzzzzzzzzzz?  I must have dozed off a half dozen times reading about different types of spectrum.  Moral of the story, if the investment thesis begins: “I really don’t understand this business, but….–Ignore anything after the “but”……

If you need another example of what not to do, I am full of them.  

I spent a little bit of time reading about this other “special” situation (it is anything but special).  For some unknown reason, a chinese entity has agreed to invest roughly $400m at a share price equivalent of $11 per share even when the stock was trading at about $7.  The $400m would give the chinese entity a roughly 35% stake in the company, so not even full control.  Even weeks after the deal, the stock was still trading in the low $6s.  I was curious, so I started sniffing.  The diagram is a rough sketch of the transaction details.

What is this company?  Global Eagle Entertainment is a:

“worldwide provider of aircraft connectivity systems, operations solutions and media content to the travel industry. Through our comprehensive product and services platform, we provide airlines with a wide range of in-flight solutions, including Wi-Fi, movies, television, music, interactive software, as well as portable in-flight entertainment (“IFE”) solutions, content management services, e-commerce solutions and original content development.provides wireless operations and entertainment on airplanes across the globe.”

Their main U.S. and anchor customer is Southwest Airlines.  Immediately, I thought, this is a horrible business.  The “newness” of the technology doesn’t allow the company to price its product appropriately since even the company does not understand full implementation costs or customer uptake.  However, in order to gain scale to cover its fixed costs the company needs to grow aggressively.  Therefore, these sorts of companies initially price their product at money-losing prices hoping to make up their losses on volume (insert winking face emoticon–John can you do this?…just curious if he reads my posts). This problem was obvious within five minutes and I should have immediately discarded the idea, however, it was a “special situation.”  

Once again, my investment idea started off with, “I don’t really like this business, but…..”

Remember Matt, anything after the “but” is meaningless.  

In an effort to not fully self-deprecate myself into oblivion, I did quickly glance (and discard after the appropriate five minute limit) at a new holding of Raging Capital this past week, Rentech.  Raging Capital bought 16% and I generally find their holdings “interesting.”  After five minutes, I concluded the following: Rentech is a manufacturer of wood pellets for heating (this has to be a dying end market?) and packing with cost overruns and production problems at facilities…and debt to boot.  I quickly discarded this idea.  Today, the company announced it will shut down some of its facilities and the stock fell over 40%.

Most special situations are anything but special. Besides wasting some of my time, all of these ideas are down over 30% since I first glanced at them.  

All of them could work out, but I have been reminded of another valuable lesson in focusing on my twenty mental punches instead of taking the shotgun approach to investing.  Special situations are typically bad businesses with some interesting event, action or twist.  However, after the “interesting event” passes, the company will still be a bad business or one that you never understood in the first place…

Verisign: The Golden Yardstick

Suzuki Violin is a method for teaching violin. There is a set of books that contain numerous songs that the children learn


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