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A Response To Significant Comments: Straight Path Communications

|Includes: Straight Path Communications Inc. (STRP)

Let me first mention the following:

There was a tweet tonight from Kerrisdale Capital: "We're issuing a new report tomorrow on a wildly overvalued short. It's an oldie but a goodie."

I suggest all readers include the following Kerrisdale disclaimer in their due-diligence.

Social media is buzzing with names although we can leave the speculation to others at this point.

Regardless, I will use any decline in STRP (NYSE: STRP), for any reason, to unwind short-dated puts to my skewed strangles and I will be purchasing longer dated calls (while retaining an overall bullish strangle). As I've previously mentioned, I absolutely want to own the 'risk' that this technology is realized but also that an existing wireless player or new entrant striving for a captive user-base, could see STRP and their licensed mmWave spectrum as a prime and early stage acquisition.

I received some timely comments and I thought this was an appropriate opportunity to address these comments regarding Straight Path Communications. I began writing on STRP simply because I thought it was a story that deserved to be told and one that was not being covered by the sell-side. As always, I appreciate all comments.

Key points:

  1. When I wrote about a "valuation," in my article, A Potential Bidding War for Straight Path Communications, I think it would have been more appropriate to label the section "qualitative approach to assigning potential value." As I've stated, there are no "comps" from which to help value mmWave spectrum. My goal was to speculate, using an extremely rough methodology, how one could back-out a ballpark value from a deal between Verizon (NYSE:VZ)/XO. This was made absent of a "sum of the parts." At the very least, I was trying to show that there is a possibility that some acquirer might view the value of the assets as being greater than current market, if not much higher. Some comments have also suggested that the $1.8b VZ/XO deal was separate and distinct from the spectrum lease and option. There MUST be a value attributed to Verizon having the option to buy the 28GHz portfolio in 2018 (for an unconfirmed $200m). In addition, this deal was made in February prior to so many regulatory and technological advancements. This is a new technology that is developing with every week. Ask any industry insider; this is not science fiction spectrum.
  1. If you've come across commentary regarding the FCC's 600 MHz auction, you will see that it has been an incredible struggle. One argument made by others is that there is little demand for this type of spectrum (600 MHz) because the industry is now focused on the potential for 5G, which is likely to utilize licensed and unlicensed higher frequency spectrum (such as the licensed holdings of STRP) to meet the significant expected increase in bandwidth demand. Since high cm and low mmWave spectrum will be used in addition to existing lower frequency holdings, perhaps this explains PART of the weak demand for additional low frequency spectrum. In addition, the FCC has been exploring unlicensed spectrum and shared spectrum to help meet expected future demand. If you have ever struggled to post a photo at a sporting event or concert you can understand that bandwidth supply is obviously short of the explosive demand (of the future but even now). The reason the FCC utilizes a licensing scheme is to promote investment and innovation. If the wireless community operated solely on unlicensed spectrum, what company would invest the billions needed on the infrastructure (small cell, fiber networks etc.) needed for 5G or any business for that matter?
  1. Last and MOST significantly, I would like to thank user: Keubiko, who rightfully brought the Consent Decree front and center.

The following paragraph should be seriously noted:

"17. Enforcement of Part 101 Discontinuance of Service Rules. The Bureau agrees not to pursue an investigation of Straight Path for a violation of the discontinuance of service provisions contained in Sections 101.65 or 101.305 of the Rules regarding the License Portfolio for the period of time between the Effective Date and earliest of: (NYSE:I) the closing date of the last transaction(s) to transfer or assigns the License Portfolio as specified in paragraph 16; (ii) the occurrence of an Event of Default as specified in paragraph 19; (NASDAQ:III) or twelve (12) months from the Effective Date, unless applications are pending with the Commission to transfer or assign the entirety of the License Portfolio as specified in paragraph 16."

Essentially the FCC has provided STRP a gift. That gift is to sell the spectrum, take 20%, and thus, the shareholders of STRP (not IDT (NYSE: IDT)) remain unpunished for the actions of a previous licensee.

This language is very significant in that while STRP does possess the option to pay the $85m and retain the licenses, it could, as a result, open the firm up to an additional investigation. I will not even begin to get into a discussion about how in 12month's time, the 5-year statute of limitations will have passed. As an investor, it is in my interest to see STRP sell their portfolio. I would also like clarity on the STRP/IDT Separation and Distribution agreement that states, "IDT is obligated to reimburse the Company for the payment of any liabilities of the Company arising or related to the period prior to the Spin-Off."

One thing the FCC does not want, however, is for these licenses to be tied up in litigation. The FCC remains entangled with the now privately held FiberTower in a case that is set for 2019. Lets also not forget the incoming administration that has already been outspoken of the FCC's overreach (in general).

So now the question is, what leverage will the firm have to market their spectrum for top dollar? The great thing about 5g is that this is not simply a market for a subset of the wireless community. The vast number of new entrants looking to have a captive stake in this developing technology is staggering.

While I hope it never gets to this point (as it has with previous 24GHz and 39GHz holders), the following passage should similarly be noted:

"26. Severability. The Parties agree that if any of the provisions of the Consent Decree shall be held unenforceable by any court of competent jurisdiction, such unenforceability shall not render unenforceable the entire Consent Decree, but rather the entire Consent Decree shall be construed as if not containing the particular unenforceable provision or provisions, and the rights and obligations of the Parties shall be construed and enforced accordingly."

The risks associated with STRP are well covered by the firm's annual report. I utilize volatility as opposed to a simple long cash position simply as I view it as the most efficient allocation of capital.

Warmest Regards Possible

Disclosure: I am/we are long STRP.

Additional disclosure: Long skewed (to calls) strangles, small cash long.