An Unusual Activist Target With Dividend Potential

Summary

Maglan Capital has renewed its pressure on a small-cap telco.

Not a conventional activist, they are only able to make recommendations.

Still - the company should at least listen when it comes to dividends.

Subscribers of "Catalyst Driven Small-Caps" got a first look at this.

I'm not a huge fan of Maglan Capital, which was pushing SunEdison (OTCPK:SUNEQ) as a long for awhile. Plus, they're not what I'd consider an activist investor. However, do they deserve some credit for finding an interesting company in FairPoint Communications (NASDAQ:FRP).

Maglan has been an activist at FairPoint since Jan. 2011, when it owned ~18%. Today it owns ~7% as shares have fallen nearly 40% from when Maglan revealed its activist stake. The company came out of bankruptcy in 2011 only to see its stock hit hard. Eventually, in 2013, Maglan got more aggressive and started pushing the company to sell assets and focus on the New England business.

Their thesis today is that FairPoint needs to sell itself. This is a $400 million market cap telecommunications company. The other option, absent a buyout, would be getting FairPoint to do a buyback or dividend.

Now, FairPoint has been trying to find a buyer for several months, having contracted Evercore to shop itself last year, and it looks like there is no white knight coming to the rescue on that front.

I'm not sure FairPoint ever becomes the shareholder returns story that Maglan would like to see, much less getting itself bought out. Here's Maglan's recent letter, where the fund calls the balance sheet much improved, but the valuation is disconnected from that and its strong operating performance. Such is the life of a small-cap telco.

Shares were trading in excess of $20 a share in 2015, but has since reset back to around $15. Hence, the renewed pressure from Maglan. Now, there's no reason we won't at least see a dividend from FairPoint in the near term, where it's now generating more stable cash flow. Assuming FairPoint can generate $50 million in free cash over the next year, just a 50% payout of free cash would be a near $1 a share dividend.

Telecoms are known for their dividends, so to not offer one, makes owning a non-dividend payer less likely for the majority of its target shareholder base.

The dividend remains the biggest catalyst here. Maglan has to hope the company caves, which it should, and offers a 6% plus dividend yield in line with peers like CenturyLink (NYSE:CTL) and Consolidated Communications (NASDAQ:CNSL). That should push the stock back toward $20 a share and give Maglan an exit point. As a side note, Maglan sees fair value around $23 a share, which would be 6x EBITDA.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FRP over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.