M&A Speculation In Healthcare And Spectrum

by: Hazel Capital

Over the past month I added several new positions as I think about the evolving M&A landscape. A new wind is blowing in Washington and I want to be positioned to catch some updrafts, so I've purchased a mix of value and catalyst driven investments.


New Healthcare stocks - HUM and CI

I'd mentioned interest in Humana (NYSE:HUM) previously, and decided to take the plunge along with Cigna (NYSE:CI). I already owned UNH, and it seems that all 3 have good catalysts in their favor:

  1. Fundamentally low valuations at times of purchase. Trading less than 10x EBITDA, 10x FCF.
  2. More favorable Medicare outlook for HUM in particular, but really a better regulatory outlook for all 3.
  3. Potential to benefit from rising interest rates.
  4. Higher probability of M&A approval post-election.
  5. Enough cash on hand and deal-break-up fees to provide meaningful shareholder returns should either deal fall through.

The ultimate catalyst would be for the acquisitions to go through, but even if they fail I think health insurers (along with telecom and cable providers) face a much more favorable regulatory environment than they did 6 months ago. Cigna is the longer M&A shot between HUM and CI, but also has about 2x the potential return upon deal close.

Speculating on spectrum - DISH and GSAT

Spectrum is a fascinating asset. It is as ethereal as property can get, akin to owning yelling rights at a certain note, and yet it appreciates in value over time in a manner similar to real estate or guns. To that end, I have been thinking about two companies which hold a lot of spectrum assets: DISH and Globalstar (NYSEMKT:GSAT). It is becoming clear that 5G is still 3-4 years away from mass implementation. Furthermore, it seems to be the case that new transmission technologies are moving towards higher bands.

Crazy Old Coot Charlie Ergen may have overpaid for AWS3 spectrum, but let's think about the cards which this well-known gambler is holding now. He owns a legacy satellite service company which he can either milk for cash or spin-off in the future, and separately he's sitting on a lot of mid-band telecom spectrum. I opened a small placeholder position, but it is hard to get too excited about DISH at this level. There could be more attractive entry-points in the coming months.

I would be a rabid buyer under $50. Not for the legacy company or for Sling TV, which is meh, but solely for the spectrum. Even with the current Broadcast Incentive Auction's crappy $/mhz-pop numbers as a potential detractor, I think eventually that mid-band spectrum will be valuable. 5G is looking to be similar to 4G, except also utilizing mid and high band spectrum. If anything it should result in a higher premium for Dish's ~75MHz of mid-band spectrum holdings, which the market is currently not valuing appropriately.

Reports started swirling this week that GSAT was finally going to receive TLPS approval from the FCC, so I bought in at $1.81 yesterday. The official FCC approval came out today. This is another small speculative position. 11.5Mhz of spectrum that sits alongside 2.4 GHZ is worth something. Many wireless devices already have the hardware in place to use the extra spectrum, requiring at most a firmware update. I don't fully understand what Globalstar is working towards at this point, but the stock has been so heavily beaten down from these proceedings (and is so heavily shorted), and I expect some upside in the near-term.

The company plans to use the spectrum in question for "low-power operations that support traditional mobile broadband services, including a variety of voice, data, and text applications. With its future terrestrial partners, Globalstar would operate these low-power systems in a variety of settings across the United States to support high data rates and provide consumers with additional terrestrial broadband capacity."

I honestly think GSAT's business plan is not great, and I am also wary of the secondary offering which GSAT will need to issue within the next 6 months. Alternatively, GSAT has lots of issued debt. With a company this precarious, I prefer to open a small equity position and await the announcement of some sort of partnership, and I think it could go to $3 by springtime on the news. GSAT has been a seemingly endless story of FCC bludgeoning, so I expect shareholder interest to rise. This is a highly speculative and very small holding at this point given the debt load and lack of operating cash flow.

As an aside -I haven't been following Maglan Capital much, but they have both a position in GSAT and in FairPoint Communications which is now being acquired. Merry Christmas to them. This might be a fund worth watching in the future.

Thinking about where the telecom space is going I am still most excited about CSAL, CHTR, and TMUS based upon the fundamental cash flow growth and potential for M&A.

Trina Solar is acquiring itself with cash

I am putting a premium on cash liquidity right now for the most part, and most of my recent positions involve catalysts within the next 12-24 months. So why am I messing around with a Chinese solar manufacturer?

The offer is all cash for $11.55/share. The current price is $9.25. If the deal closes by April 2017, it would yield a 24.7% return, or 92.6% annualized.

The story here is pretty simple. Trina Solar (NYSE:TSL) happens to make solar panels in China. The biggest shareholder, CEO, and founder Jifan Gao wants to take the company private. China is working to restrict capital flight from the country. From what I've read, it doesn't look like TSL will be impacted by this new rule. The small market cap and dominant solar market position increases likelihood that the deal gets approved in my mind. My reading is that China primarily wants to slowdown the overseas acquisitions rather than stop a company from buying itself back. TSL is also not trading expensive at 6x EV/EBITDA, even with modest expectations going forward.