Papyrus Capital's Nitin Sacheti updates his $VATE thesis (Podcast #175)
Nitin Sacheti, Founder and Portfolio Manager at Papyrus Capital, is back to update his INNOVATE (NYSE: VATE) thesis. In his first appearance on the podcast, Nitin went into detail on all segments of the INNOVATE business, a highly levered holding company with three operating segments in: Infrastructure, Life Sciences and Spectrum. The stock has been volatile of late, and as Nitin notes in the beginning of the interview, "because there's a lot in here, there's some businesses that have done better than I had originally thought they would do when we first discussed it 20 months ago."
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Transcript begins below
Andrew: All right. Hello and welcome to yet another Value podcast. I'm your host, Andrew Walker. If you like, this podcast would mean a lot. If you could follow rate, subscribe, and review it wherever you're watching or listening to it with me, say, I'm happy to have on for the second time Nitin Sacheti. Nitin, how's it going?
Nitin: I am good. How are you doing, Andrew?
Andrew: I'm doing great man. Let me start this podcast the way I do every podcast. Quick disclaimers remind everyone that nothing on this podcast is investing advice. That's always true, but particularly true today. We're going to be talking about a company, a little over a hundred million dollar market cap, very levered, semi-controlling shareholders. So people should just remember this is E-liquid, microcap levered. All of those come with absolute added risk. So please, we're not financial advisors. Do your own work. Tell the financial advisor, all that type of stuff. Anyway, Nitin then the company we're going to talk about is Innovate. The ticker is Vate. You actually came on about 20 months ago to talk about it for the first time. So we're kind of doing an update podcast in honor of that. I was re-listening to the podcast. I wore the same shirt as I did for the last one, so I'm ready to go, man. People should go listen to that. I'll include a link in the show notes. A lot of what we discussed has held up pretty well. Some things have obviously changed there. So, I'll just flip it over to you as we're talking June 2023. What's changed, what's different? What are you thinking about Vate?
Nitin: Yeah, thanks. No, thanks for having me back on. I always love, talking to you generally and coming on here, so I appreciate it. Look, what I would say is I guess I would start by saying the stock has been extremely volatile. And I think when we were originally talking about it, it was higher than it is now. I think it's, even this past quarter, the stock rallied back into the threes. Now it's back in kind of the dollar $30, 40 range. It was down quite a bit on sort of triple witching, last Friday. So it's volatile and, is it some combination of retail plus quants plus options, plus illiquidity? Yes. You know, all the above. We don't quite know.
But what I would say is that the value is there, especially on the asset side. The monetization potential is really there. And I think, there are some businesses, because there's a lot in here, there's some businesses that have done better than I had originally thought they would do when we first discussed it 20 months ago. Some have done worse than I would've thought, they would've done. But I think all in, yep, things are going along as planned and you kind of have the opportunity, your listeners have the opportunity to step in here even lower than when we originally discussed it. So I think that's a positive. What I would say is that there's just very little price discovery, in small and microcaps right now. I think you've had capital sucked out of the stock market in businesses like this that are Harry's special situations, even mid-cap Harry special situations, you've seen massive multiple contractions.
Small cap plus Harry's special situation you've seen even more. And so there's just so little price discovery here in terms of what is the actual price of the stock, and where should it be. I was talking to a friend the other day and basically saying, if you told me the stock were at a buck 50 today, I'd be like, yeah, that makes sense. If you told me the stock were at 350 today I'd be like, yeah, that makes sense. There's just sort of this range. For us in the fund, we were in my fund, we were stepping in and buying this thing hand over fist when it was trading in the dollar below a dollar, late last year. And when it kind of rallied back above 253, 350, we were kind of pairing back our position because it got really, really big.
So we've sort of traded around it a fair amount. We were buying a little bit on Friday, just given the other the opportunity we had to buy it in the buck 30, buck 40 range. So I think it's, again, I still feel like it's a very, very interesting story. And the crux of the story for anybody who listens to the first 10 minutes and then drops off, the crux of the story here is that they have a giant maturity that comes due in early 2026, at the [inaudible] level, right Andrew, and you know, as well as I do.
And, this business has a lot of asset value, right? But you also have holders of it. You mentioned the control shareholder chairman, you have holders of it who have a lot of patience and they understand that there's huge asset value here and that asset value is growing, right? And so they're not as focused on the short-term stock price as they are on monetizing the businesses and the assets at the point at which they can extract the most value. So what does that mean? If they could snap their fingers and sell one or two of the healthcare businesses today, for quite a bit of money, they would. But the thing is, they're not going to get the same amount today as they will in a few years. So why sell Meta Beacon for $500 million today, when even if it makes your stock go up to five or six, right?
When you could sell it for a billion dollars in a few years. So, and I know you've covered sort of that very well in that piece of the business. And Andrew, so my point is that you really don't have a drop dead date until this maturity in early 2026. And so the nice thing we have here is we know that we kind of have that light at the end of the tunnel and we know that we probably have room for upside before that as they monetize assets. But look again, until asset monetization happens, this thing could trade in the $50, $2, $3 $4 range between now and then, right? It's all about kind of the sentiment trade and the theoretical nav value people put on it before we actually see asset realization. But again, we have a wall with that debt maturity and if that debt maturity were to happen today the company could snap their fingers and sell some assets, right? And the stock would go up multiples, right? But they just don't care about that when they know they can sell those assets for more in the future. So I'll leave it there because I think that's kind of a good kind of couching of the thesis.
Andrew: No, look, it's one of the things when you've got, once a semi-controller controlled shareholder gets over like 20, 30, 40%, they kind of know, hey the stock price on the market doesn't matter to me because I'm never realizing that price, right? Like, hopefully, if you got a company that's like really cash rich, they can go and buy that stock and take advantage of it if it's too cheap. Or they can issue shares if it gets way too expensive, but they kind of don't, the day-to-day movement might not matter as much as us everyone else in the world cares about, like where it's moving. Because again, they can't realize it. So a lot of them are focused on long-term value. Let's actually start with the controlling shareholder, right? So the controlling shareholder here is Avi Glazer. He owns about 30% of it through Lancer Capital.
Lancer has done, we'll talk about some of the deals in a second, but I guess Avi Glazer another situation I'm following is Manchester United, right? And Manchester United is rumored to be up for sale.And the Glazer family it's like a little mini-drama. I follow them on Bloomberg now and oh my God, the Daily Mail, like seven articles a day like clockwork following everything. But I guess a few questions, a, just to start Manchester United does it matter if they sell for 6 billion, or if the Glazers are maintain control and just get some minority investments so that they can improve the stadium? Like, do you think what happens there will have an effect on Vate? And that's a small question I'll use it to expand into bigger questions.
Nitin: Yeah, I mean, look, I will say I'm not going to talk about somebody I don't know with any certainty. So what I am hearing and what I'm seeing is kind of the same as what you are, I guess is the first thing I would say. But, from what I'm seeing some of it, some of the rumors are that it could be the super voting, right? And so certain people out there are saying, oh, well if you are a buyer of Man-U, why would you not just buy out the family with the super-voting and leave the public shareholders to kind of twist in the wind, right? Other people are saying, well it's a trophy asset. Any buyer of a trophy asset is going to consolidate the whole thing.
Are they going to hit the bid? That, or I should say, is the bid going to hit the ask that the Glazers have? And I don't know what the answer to that is. I don't know how it unfolds. I think at least over the time I've been in this industry, you've seen, I've seen, I've been surprised by how much trophy assets go for and kind of the sheer amount of wealth out there and what people are willing to pay for this stuff. So, maybe, maybe not, I just don't know, in terms of how it affects Vate, the one thing I would say is that there is a poison pill in place because there's a very large NOL here. And so, at this point if anybody with who's well-capitalized and even though one thing I can say is, clearly the Glazers are well capitalized again, not that I'm speaking from any experience or any knowledge of my own they are well capitalized. So they you could buy a stock at any point. And we know historically he had been buying stock, below $4. And so anyway long story short maybe but again, it would have to go through the board, and they would have to make an exception to the poison pill or wait for it to expire.
Andrew: Perfect. So I guess the three things I want to jump off from there is you mentioned the poison pill and you'd been buying spot stock. And when we last spoke in October 2021, Avi and Lancer had come off, like one of the things I think was interesting was they were buying stock on the open market pretty aggressively. They got up to about 30%, which is about where I think they're a little under the tax plan, but they're not much the poison pill or whatever you want to call it, they're little under it, but I think they're basically brushing up against the limit. So I believe he requested an exemption last year. I don't think that was granted, I guess I just want to ask, and we can use that to talk about the board drama that played out as well last year where he announced that he wasn't going to vote for three members of the board and he basically got his board. But I guess just why isn't he buying what's going on with the poison pill? He asked for an exemption. Why wasn't that granted? Like, what's going on with the board drama there?
Nitin: So the issue you have here is this whole change in control, right? Excuse me, change of control and how it impairs the poison pill, excuse me, impairs the NOL what am I saying? And so that was why the poison pill was originally put in place. Now, a lot of those initial transactions happened around the time of the activist. And so that was 2020, and that was again, when the activist came in, when the chairman came in, when a couple of other larger investors came in, whether for or against FOFA Cohen, the previous CEO. And now we're sort of getting past that three-year point of impairment of the tax asset from changing control. And so what I would say is that you kind of have this 50% threshold, right?
And so as, again, more of those original transactions sort of expire, I guess is the way to put it three years later you have less and less of a need for that poison pill to be in place. As to the board drama I can't speculate as to what exactly happened. But what I can say is the exemption was not granted. And, that now we're at a point where it could be right the board could make special allowances for shareholders to come in and buy more stock, right? And that could very well be the case that he steps in and buys more. Again, I can't speculate, as to what he would do, but without tripping, any of, or impairing any of the NOLs, he could very well step in, later this year and buy more stock. Is he going to take this company private with Man-U proceeds? I think that's the question we're sort of dancing around to. And I don't know the answer to that, but I think that it's hard to impair NOLs and, a real driver of value just to consolidate, if that makes sense.
Andrew: Oh, you know what, I should just disclose right now, maybe I should undercut. We have a small position in both Vate and Man-U. So I am kind of talking my own book here, but that wraps into all the disclaimers and everything. Yeah. I guess the thing with Glazer, I was kind of dancing around that, but I guess what I, the other thing I was concerning is like, Man-U has been, they announced they were doing a sale in November. If you were,
Nitin: I'm not saying you were dancing, I was in my answer.
Andrew: Say again.
Nitin: You were, I'm not saying you were dancing around that. I was...
Andrew: I guess what I was kind of trying to work towards is Man-U, the sale was the strategic calls was announced in November. Here we are, end of June, there's been like the Qatari bidders have lobbed like five bids. Everybody says this process has been really disjointed. The family isn't altogether, obviously, that's a family trust which has succession issues and stuff like succession the TV show style issues and dynamics around it. But I guess when I look at Vate and I'm like, oh, like there's some drama here, right? Lancer like, doesn't reelect the board, the tax. I'm like, it just seems so disjointed. I just wonder about the disjointed, and then there's the, anyway, let me go to something else. So...
Nitin: So, can I'm just going to add more on that, is that this isn't a disjointed situation because you have one, person who's legitimate right? And he's the only one sort of involved here for what that's worth. So, he can come to a decision if he wants to buy more stock or vice versa. But I think that that connection is really are there proceeds for Man-U to step in, and buy more? Yes. But is he also very well capitalized? You know, again, I don't know, but I would assume so. So, we don't necessarily need Man-U to go through for, somebody who's a large owner of this stock to buy more. Either way whether or not Man-U happens, do I think that this business gets taken out or a take-under happens? I'm not sure, just because, and I think it's doubtful because you impair the NOLs.
Andrew: Let's turn to, you mentioned, so at the start of the podcast you mentioned, Hey, some of the pieces have worked better than I thought since last time. Some of the pieces have worked worse than I thought would happen. And one of the things, I re-listened to, I'm going to say 90% of the podcast that we did last time in prep for this one, because the last 10 minutes, I just, I had something else do, and I couldn't quite sneak it in, so maybe I'm bad podcasters. But the, one of the things that jumped out to me is when we were talking about it, you had a direct quote that you said, look, Innovate has been a parentally underperforming some of the parts story, right? Like, this goes back to the Phil Falcon days and everything you said that, and here you and I are almost two years later and we'll talk about the parts performing better, parts performing worst, but we still have a parentally underperforming some of the parts story So I guess just like what's going to change the story, is it just the whole cadet coming due and like them being forced to sell because you've just got all these parts and I think people are just so burnt out on this thing.
Nitin: I mean, look, it's until nav some of the parts trades are sentiment trades, right? Until those, some of the parts are realized, and this is no different than that, and I think you're in a very different market than we even were in 20 months ago, right? And I think that is a very different, some of the park, excuse me, excuse me, some of the parts markets than we were in five years ago. Like, I can tell you that when there are a lot of hedge funds, sort of small, long, short funds, value special sets funds in the market buying these some of the parts stories you would see stocks get buoy based on sentiment, based on trades, right? Investment thesis, you wouldn't necessarily see the actual real realization of the assets. I think what's happened since then is you've had this, again sucking of capital out of special situations, right?
Andrew: Outta special sits and inside AI, all you gotta do is go...
Nitin: That's right.
Andrew: Well, look, so you mentioned at the top of podcast some of the stuff has worked, some of the stuff has not. Let's start with what do you think has worked out well over the past, let's call it two years. Like, kind of what's tracking better than your thesis?
Nitin: So I think that the revenue at DBM has tracked better than my thesis. The margins have been, the EBITDA margins have been lower. And so I think you kind of shake out as expected, I think what's been better about DBM than I would've expected is the tail. So I think this whole onshoring boom, and what you're seeing from IRA, what you're seeing from new semiconductor fabs and sort of all that, and I was at an industrials conference last week, and every steel company I met with every aluminum company I met with was just telling me they're not, even though people are talking about recessions, right? In the big projects at least, yeah. Yes, the small projects where regional banks were financing them, and maybe after SVB and some of the issues we've seen in the last four months or so you've started to see a decline in some of those commercial projects.
But the large-scale projects with DBM plays in, you're not seeing any sort of drop in demand, right? And then they were also saying, and I think where, so, so that was better than what was expected from me. One of the things I talked through originally in the podcast was the infrastructure bill, and we haven't seen any of that. So this revenue beat, versus my expectations has been really just through everything we're seeing with the onshoring boom. I think the next step is really the infrastructure bill. And, talking to sort of a lobbyist, few months ago, and, talking to some of these companies, one thing that they were saying is that they're seeing the subsidies from the IRA bill happen faster than the actual spending from the infrastructure bill. Even though the infrastructure bill was past significant quite a bit earlier than the IRA and some of that was a function of the fact that how they were structured, right?
When you're talking about actual funds moving from the federal government, then to the state governments, from the state governments to private contractors, that takes a really long time. Whereas when you're talking about a subsidy, companies just get the tax subsidy they just start spending right away. And so you've already seen IRA, you haven't seen infrastructure bill, you're just starting to see that. So, look, I mean, cyclical businesses we see the backlog. We can look out 12 to 18 months, but they're cyclical for a reason and they could tail off. So I'm not saying I'm a hundred percent certain on anything, you just can't be, but the point being that I actually think the tail on DBM is longer than expected. And now maybe it's worth getting to into the quarter and kind of a comment they made in the drop in the stock price based on DBM if that works.
Andrew: Yeah, go ahead.
Nitin: Okay. So basically one of the things that they said this past quarter is that they're seeing more competition in some of the smaller projects, right? Or there's more bidding going on, and...
Andrew: The direct quote is beginning to see the market somewhat tighten and more competition on project bids. Yep.
Nitin: Yeah, good point. And then on top of that, we saw a miss in revenue in the quarter in DBM. And so what I would say is that the miss in revenue and, so people putting those two statements together obviously freaked out and then sold the so down but, or maybe it was quants, who knows? But, the point being that when you see those two statements together, it's understandable that there's a risk. I think the backlog, the 12-month backlog, hasn't changed.And historically that 12-month backlog has pretty much come to fruition. And so it was a timing issue. These are very, very lumpy projects. You know, a single project is potentially 10 to 15% of revenue. And so if you have timing in terms of the one that was highlighted is really the JFK expansion, right?
And if you have that timing not happened this quarter happened next quarter happened the following quarter, right? It's going to affect your revenue booked in that particular quarter. So I think that is sort of the first issue that the revenue miss was really just timing. I don't think there's much of a problem there when you look at the 12-month backlog. And kind of the overall backlog, in terms of the statement around, the more competition. I think the point there is to say that this is not going to keep growing at the same rate at which it's been growing the last few quarters. And again, some of that's my interpretation. Some of its conversations with management, some of its conversations with sort of outside experts, but I think all of those triangulate to the conclusion that this business isn't going to keep growing. But that doesn't mean there isn't a long tail to it. And if there is $120, $130 million in EBITDA on the long tail of that, I think we're comfortable putting six to seven to eight times multiples on that. So that's sort of where I would leave the, where were we right, where were we wrong, on DBM?
Andrew: Let me just one more on DBM. So I do hear, especially if you and I have been talking six months ago after this is their fiscal Q3 22, oh, no, that lines up with the calendar. I've got my dates so confused at this point, calendar and fiscal Q3, like they had a massive jump in backlog, right? It goes from 1.5 billion to about 2 billion. And at that point, I think a lot of investors start saying, all right, the DBM story really has laid, as you said, IRAs coming through infrastructure just starting to come through. Yeah. The margins haven't inflected yet, but we're going to start getting that margin, and I definitely do hear it, right? Like, this is a project management business. Projects get delayed, like revenue can get pushed from one quarter to the next. But I do just want to dig on two things like the backlog, it's still above where it was before that big jump, but it's come down quite a bit since that big jump.
And they say, Hey, we're still seeing projects, as you said, it does sound like they're getting like the weakness thing that they, we talked about in the Q1 call, they did not have that in their prior call. So it does sound like they're acknowledging the market's getting rate. And then b, I'm just a little disappointed like their backlog went up so much, it seemed like the environment should have been great for them, and the margins never really got much better. So I look at the two and look, we talked and people can go listen to call if you just slap a, it doesn't take an aggressive multiple on even the results DBMs producing now to get a value probably a lot higher than the markets kind of pricing on this. But I was just like a little disappointed by that all-in bundle. If I can just kind of throw a random stream of thoughts at you.
Nitin: Yeah. So what I would say on margins is that you're still working off, some of the COVID-related stuff that was at a much lower margin. So as that revenue is recognized, those margins are lower, but you are seeing them creep up. The other thing I would say is that OPEX is fairly fixed, right? And so in something like this past quarter where certain contracts we didn't recognize the revenue this past quarter, right? You're going to have a lower EBITDA margin because your revenue base is lower on the same OPEX, right? So you know that, but that will reverse itself in the quarters when you book greater revenue, right? On the same fixed OPEX. So, I would say that's part of it in the short run on margins.
So I do think they are going to creep higher over time. Are they going to get to 13%? Probably not. Are they going to be above 8%? You know, very, very likely. Right? So I think that's kind of the steady state at which we, you know, where we are in terms of margins in terms of backlog, I think it jumps around a bit, right? One of the other things that they've talked about is that there are projects that they're fighting for, right?
Nitin: And so all it takes is a couple of those projects to get back to above $2 billion, right? So it's just, and again the reason there's so much uncertainty here, and the reason the stock is where it is now is like you can make either argument, right? Like I can say to you, 1.8 billion, oh, that's the backlog. There's going to be three new projects that's going to get you up to 2.2 billion, right? Like, or you could say, oh, well, this construction boom is declining and we're lapping the onshoring and, backlog is going to keep declining. And I think that everything I'm hearing is that, that's not the case with large-scale projects, but again there's uncertainty in a cyclical business, right? We just don't know. The world changes very quickly in these sorts of businesses. So, I can't tell you we know, but I do think we're being compensated for that in the stock. But what I would say is, again, you put a seven times multiple on a run rate hundred what do you call steady state EBITDA in this business, right? Even if the backlog is coming down a bit, 110, 120 million, you put six to seven times multiple on that. You take out the 240 million in debt and you're still at a stock price that's significantly higher than where the whole is trading right now for what that's like,
Andrew: Let's go to other segments. So again, you said some of the stuff has worked, some of the stuff has not. Is there any other segments that have kind of worked better than you thought they were going to play out?
Nitin: I think in healthcare, I think R2 has probably worked out worse than I would've expected. And not, so I've done a fair amount of work on that. I went to a couple of, like the dinners that they did in New York. I went to a dermatologist's office who have the machine and kind of saw it in action. It didn't take any of my sunspots out. I didn't try it, but, I saw it being used and it seems like it works. They're going for sort of additional use cases with it. And so I think things are chugging along. I think the China side of the story was weak with zero covid and they kind of highlighted that in the numbers. But it did, it has not played out as I would've expected it to in terms of revenue run right? That said, I think that Meta Beacon, and again, you've highlighted this too,
Andrew: Let's just pause on R2 for a second, because it was a big piece of the story and I guess Lancer, which is Avi's firm has been doing a lot of lending into R2. It's been like, pretty distressed financing and it started to come in bits and drabs. Now I think like 18 to 20% interest rates. Obviously, those are related party loans. It's due, actually, they took it out with a convert note, if I'm remembering correctly. But I guess when you just look at R2, do you think, is that a write-off at this point? Obviously, there's always like kind of call option value there, but do you think that's just completely behind us, or do you still see a good chance of value there?
Nitin: No, I think there's real value there. And I think that it is worth several hundred million still. I don't, I think the timing, it's just taken longer. I think the technology is real. I think the use cases are real. I think they're proving more use cases out of it. I think it's more sort of benign than, in terms of the treatment than a laser, which is kind of the substitute treatment, which a lot of these dermatologists are using. So I think there's a lot of use cases for it. I think they've shifted from a, purchase the machine upfront to a leasing model, and that shift to a leasing model has kind of reduced some of the initial revenue growth you would've seen from it. But it's also probably increased the number of aesthetic facilities and so forth, small dermatologists that would buy something like this. So anyway, long story short, I do think it's real. I think there's value to it. I think it is worth several hundred billion. I think it's taking longer than expected. So that's where I would put that. I'm sorry if my tone came across that,
Andrew: No, no, look,
Nitin: Not because it's not,
Andrew: I just, I remember being very excited about this and as like I followed it and kind of stayed up to, I've been just really disappointed in that segment because I'm with you. I thought it had a great shot. Obviously, the management team there had a history of like kind of building up, pretty nice-sized businesses. These businesses where you get something into a dermatologist or whoever's office recurring use. Like, there's always teens who have some skin issues. I certainly have some skin issues like you, it's just a great market if you, once you get into it and break into it. Lots of expensive upfronts. But I've been pretty disappointed. You know, like, Cutera is a company that I've done two podcasts on here. They apples to oranges, they both do skin, but that's acne versus some but they just, like, they've shown me the leasing model is the way to go. It's good that R2 switched there, but they're growing so much faster. And even their just point on growth. I just, kind of look at R2 so far. I'm like, ooh, I don't know. It's really off to a slow start.
Nitin: I think it takes time. The other thing one of the dermatologists had mentioned to me was that why isn't Rox Anderson behind this kind of advocating it the way it was done with CoolSculpt. And again, I can't say I know him. I don't want to speak for somebody, I don't know. But, what I would say is he has started to, and you've sort of seen this at a couple of industry conferences. And so, I do think there's value there. I think it's going to take time, for what that's worth. But I do think Meta Beacon is performing.
Andrew: Yeah, let's talk Meta Beacon. Great.
Nitin: Yeah, I mean, I think it's performing above my expectations. I think one of the feedback I received after I did your original podcast from somebody involved was that the, what I missed, was the potential value of Meta Beacon. And so I think that is, bigger than what I expected it to be. Since then I've talked to kind of more kidney specialists, and nephrologists and they've said, wow, this is very cool here's no real kidney GFR real-time measuring system out there. They're sort of they've pretty much gotten through the FDA pivotal trials, right? Which is obviously a lot, faster for a device than it is for a drug. And so my sense is that this is the big monetizable asset here, right? They're not going to monetize DBM, DBM cash flows effectively cover corporate OPEX over time as they're waiting to monetize some of these other interests. But I think that Meta Beacon is really the one that they could press a button today and sell it if they wanted to. But I think, if they pressed a button in two or three years, I think it's worth significantly more. And so I think that's really the value of this one.
Andrew: And so Meta Beacon they are preparing for FDA submission, they're going to do sometime this quarter. We're talking June 2023. So I mean, at this point it's this month, right? Because I don't believe they've submitted yet.
Nitin: Yeah, I mean, from what I understand timing to actually get approval, is sort of what I've been kind of asking them about. And that is the end of this year, early next year.
Andrew: Okay. And then, so great that's so timing to get approval end of this year or early next year. And Meta Beacon they own, I think it's a bit over 40% diluted. Tell me what you think Meta Beacon could be worth if they get approval and this kind of works out.
Nitin: I mean, again, so hard. I do think it's a unicorn, right? And if it's a unicorn, and again, I think the idea is it's a platform, right? Yeah. Obviously, the kidney addressable market is huge, but you know, there's so many more organs that the platform could be used for. And so again I think it's a multi-million dollar company. And think about how much value that is for exactly what you said the ownership stake is.
Andrew: So is it, it's Huadong I believe is their Chinese partner who's been providing a lot of the funding. The last time they funded this was they funded 10 million in kind of late 2022. I guess just two questions. How does that partnership work? And if this has such unicorn potential, why are they letting Huadong kind dilute the potential here instead of maybe, I don't think Innovate has the capital to fund that $10 million, but maybe going to Lancer and seeing if they can get really expensive debt, but that doesn't dilute their funding or something.
Nitin: Yeah, I mean, it's a good question. My take is that this doesn't as a whole going forward it doesn't really require much additional capital. And so if it, doesn't require much additional capital then I think you can hang your hat on the current ownership stake.
Andrew: And so you expect the FDA hopefully approval by the end of this year. And then I guess they start ramping up next year and then maybe a monetization event maybe 18 months, two years from now is kind of how you're thinking about it?
Nitin: Yeah, I mean, I think you have a monetization event later this year, and then you have something like, excuse me, you have the FDA approval later this year, early next year, and then you have something like a monetization event, if you need it. The interesting thing here, I guess comes back to kind of the drop debt date on the debt, right? So if the debt gets done, you know, if you have sort of this debt coming due in February, right then of 2026, then, the question is do you kind of hold onto me Meta Beacon as you prove some of these other use cases and does that potentially change in terms of increasing value going forward, right? Or do you monetize it? because you have to, so I think in an ideal world again this is all very fluid, right? And so in an ideal world, you're not going to see monetization of an asset that could have much more future value, right? And so, I think that's some of the what it comes down to.
Andrew: And how do you think about value? Because I'm actually with you when, especially when I was first receiving this, I knew like there are four platforms within the life sciences, but I really had focused on R2. And I had not thought a ton about how to value Meta Beacon. So how are you kind of thinking about both the probability of FDA approval and how to value this if it is approved?
Nitin: I mean, so the way I'm kind of thinking about it is what is the kidney addressable market, right? And, trying to think through are there creative ways to put, value on kind of the tracer technology, and then can you figure out what a revenue multiple on something like that would be? But it kind of shake shakes out to the fact that these platforms are worth quite a bit, right? At the end of the day. and you can kind of do all that math and then come out with something that's multiple billions of dollars. And I think it's all about the platform and the addressable market here. And that's kind of where I come out on it.
Andrew: So you said a few times the platforms are worth a lot of value. Can you just describe the Meta Beacon platform and what makes it so valuable?
Nitin: So it's really just this tracer technology, right? And so it's this idea that you're kind of ingesting this dye and you are allowing it to perform functions on the kidneys and then is that applicable again to other organs? And...
Andrew: Go ahead.
Nitin: Yeah, that's it.
Andrew: Okay. I guess what makes that so valuable though, like I was kind looking at their website as, as you said that, and I saw the dye, the novel fluorescent agents, like what's so unique about these agents that, yeah, I just don't know, like why are they so unique?
Nitin: I mean, I think some of it is, is patenting it and the fact that it's working and it's working real-time. and I think that's the other big piece of it is that it's working in real-time for kidney GFR monitoring.
Andrew: Okay. Cool. Let's, so that's life sciences, I guess let's just, so we've talked DBM and we've talked life sciences. I want to go to Spectrum. The other part, which I think if I remember back to our last podcast, that's where you and I kind of disagreed the most and that that is doing some interesting, kind of change in business models there. But let's just talk, we've talked to the parts, right? Life Sciences and DBM. How would you value those two if people are just thinking through some of the parts here?
Nitin: So look, I think life sciences, you sort of put a high several hundred million dollar values on when you combine, again, you and I talked about last time that there's some other stuff in Pan Sen, but we're not really,
Andrew: It's four companies in total. They've got these two and then Geneve and Triple Ring, but Geneve and Triple Ring have been like low single-digit million investments. So if they turn out to be unicorns, awesome. But I think they're, they don't even talk about them, to my knowledge on the past. I think I read the past four earnings calls to prep for this and I don't remember a single time getting mentioned.
Nitin: Yeah, and same thing with that Janssen option, right on that. Yeah, oncology business they sold, but anyway, so, you know, ignore all those. I think you just put value on these two if you were to put somewhere over a billion on Meta Beacon total and then somewhere on the low a hundred million total on R2, do you get to high a hundred million, right?
Andrew: What are the odds of Meta Beacon getting approved?
Nitin: From what I understand, and from talking to them and sort of outside experts, I think it's very high. I think that again, device recognition is very different than a drug.
Andrew: So a drug, if I remember correctly, a phase three trial, because these guys just did phase three, phase three trial for a drug, I think it's 66% likely to get approved. And you're saying this is a device, do you, so you think it would be over 66% likely to get approved?
Nitin: From what I understand, I haven't talked to them about kind of the exact probabilities. I haven't asked that question, but I think it's significantly higher. Yeah.
Andrew: I can't remember if a drug in phase three is 50% or 66%. So nobody holds me to the 16%, but it's one of those two if I'm remembering correctly. Yeah, I think it's I'm looking at something from another company I saw, I think it's 68% is the historical record of phase threes getting approved. yeah. Okay, cool. So we've done those two segments, I guess just spectrum. So Spectrum 2022, they kind of re redo their model, they cut off one of their partnerships, they're cutting expenses there. I think there's two questions, and this is where we had the debate last time. Like, there's the question of the value as a standalone business model, and then there's the question of, hey, you have na basically nationwide coverage of these, kinda lower value rabbit ear TV channels, but that spectrum eventually can repurposed, and sold to mobile players for, to cover, to give them increased bandwidth. I guess my two questions are the one question, how are you thinking about spectrum's value these days?
Nitin: Yeah, so I think, that what they did in, Fort Wayne Indiana is interesting, right? Because they talked about that in the last call. And they're effectively getting, they did a trial, right? And they did trial to get, LTE-level speeds on some of this broadcast spectrum. So it just goes back to this long-term use case of broadcast over LTE and broadcast spectrum over LTE. So, as we get to this point where all these 5G use cases, come to fruition, there's more of a demand for Spectrum. One of the things I would say here too is that, again, whether it was 20 months when we talked, or three years ago everybody who kind of followed these telecom businesses would've told, I shouldn't say everybody. I would say that the school of thought was that 5G would bring in this IOT demand of all of these things out there that were all using a network and they were all going to increase the demand for spectrum. You talk to somebody like Dish Networks their time...
Andrew: In my mind, they were the people when you said all these IOT and I was like, yeah really Dish met the farm on that, and they haven't seen enough of that demand come through
Nitin: Not yet, right? So the question is can people stay solvent longer than, it takes for the demand to start? But and that's very much the case I think on Dish. But anyway, the point being that these things will come to fruition, right? At some point. I mean, you just look at, and I hate to be a futurist about this and be like, look at autonomous cars and look at the amount of data that an autonomous car spews. But, it is real. And if you're talking about kind of continuous 20, 30, 40 megabits a second in data from an autonomous car, right? That has to go to kind of an edge data center like it's real. And so the point is, all that demand will come, but again, it comes back to do you monetize assets today? Do you think your assets are worth a lot more in three, four, or five years? Do you monetize men? I would probably say, and again, I haven't collaborated this with anyone, so take what I say here with a grain of salt, but I would probably say you could press a button and sell the entire kind of scalable broadcast asset, for a couple hundred million dollars today if you wanted to.
Andrew: Why do you think that, who do you think would buy it? Are you thinking like a telecom player buys it or are you thinking a strategic, a Nexstar, or a TEGNA, or take your pick of local broadcasters buys it?
Nitin: I think that if there were a well-capitalized local broadcaster that had had the cash, right? I think there's value in white-space TV assets. I think, you know, if you're a FANG and you're looking for a distribution asset that costs you very little money and has the kind of scale that takes years and years, I mean the key to this asset is scale, right? And it's no different than, any business where you have, or where you've done a lot of kind of aggregating to fill in, right? And, that's what this asset is. It's a ton of these channels that, have nothing on them and that basically cover such a large percentage of the...
Andrew: But you've got a ton of channels that have nothing on them, you and I can debate the asset spectrum value, right? Because I think that is a very, we have not to my knowledge, really seen a big spectrum mark since C-band. And I think this, which is much lower than C-band. I think there's a very interesting and open question of how big the range of values for the spectrum could be. But on the actual operating business side, I'm just curious. Like you've got all these empty channels, you access them over rabbit years. It's not like these empty, this empty space hasn't been out there for a while. I do hear you. Hey, it's much easier for Amazon to come and buy a hundred channels in one fell swoop then to go roll a hundred different ones up one by one. But, I just look at them like why would they even bother? Like why do they care if they have something people can get over rabbit ears analog tv, like they can just, most of the people they can just reach over, Hey, go to amazon.com/prime TV and access this website. And the few people who they can't, like, it's not driving that much value to get them over rabbit ears.
Nitin: I think it's the distribution mechanism that it is over time, right? It's not necessarily just, we see it as a distribution asset of broadcast tv, right? Of, video images. But it's, and I think this trial in Fort Wayne has kind of shown you that it is a distribution asset of something bigger right? And yes, maybe there's no value to that today. But the question...
Andrew: Describe the Fort Wayne trial. Because my understanding was it was just a two-way trial where, hey, we can send you a station and you can send us back data, basically, right? So you're basically forming, you're proving that this technology, you can use it as kind of a mobile network, for broadcasting, right? But is there something else to it?
Nitin: No, it's data transmission, right? But data transmission's really a valuable resource over time, right? You're I'm talking about, could somebody buy this for a few hundred million dollars and have data transmission for three-quarters of the country? Yes. And I think that's really what this comes down to.
Andrew: Do you know what speed they did the Fort Wayne trials at?
Nitin: it was LTE-level speeds.
Andrew: LTE. Okay. So yeah, so you would get, like, if you're thinking about this carrying and doing a smart, as you said, like internet of smart things throughout an entire, like city or state or something, it would be pretty, you could use this as an interesting backbone for that though. You and I have done a lot of cabling and you would wonder like, hey, a buy versus build where you go and buy this, and then you build out all the towers and stuff versus, hey, maybe you could just rent this from T-Mobile, right? Like, Hey, T-Mobile, we just want to do this all across your spectrum and you've already got all that built out.
Nitin: Yep. Yeah, I mean there's just, so, I just think a nationwide, I shouldn't say nationwide, a majority of the nation distribution mechanism that right now is just white space TV channels has so much value, right? Because at the end of the day, the data that you distribute over this is again it has so many different cases and so many different uses, right? And so my point is just that if you were to sell that tomorrow for a few hundred million dollars, would there be a buyer that sees the optionality probably, is this worth a lot more fi? I mean, I think the number that we use in the original sum of the parts was several hundred million dollars, right? When we talked about it last time. So do you wait a few years and you do more of these trials, you kind of prove this is real, and do you get it to be a lot bigger in the future than it is today?
And I think that's really the key. But the point is, is that, again, this is just like a meta beacon, right? This is an asset that you could probably sell today for a very small amount of money. Obviously a lot smaller than Meta Beacon, but, could you sell it for a couple hundred million dollars? Do you own the majority of it? Yes. And that's, it's real nav value for the stock at this price. Is it extracting the most value out of it? No. Right. And that's really the key, and that's why there's no price discovery in this stock is because they're not selling any of these things today. But, the optionality and, people are looking at the stock and being like, oh, glad I stayed away from Vate, but it's going to take time, right?
Because the asset value is there. It's just a question of pressing that button at the time when they want to press the button to get the most value out of the assets right? And at least the one thing we have for public market investors who are measured on a mark to market right? You would hope that your mark to market that you're measured on is multiple years, not three months. Like a platform and so the one thing we have here to really realize value again is this February 26th, matured
Andrew: And spec. Just, I want to go back to the February 26th maturity in a second. But Spectrum itself has 70 million of debt that's due in 2024 do you think that's a catalyst? Like they're going to have to, I mean, they might have to sell Spectrum just to cover that debt, and then if you think it's worth 200 million, that's 130 down to Vate or something right? So do you think that Spectrum thing's a catalyst? Or do you think they can easily refinance and kind of keep trying to build this out?
Nitin: They refinanced it last year, and they refinanced it with their existing lenders, and the existing lenders that they refinanced it with, basically just took some equity and extended out the maturity. So
Andrew: It's due in 2024, right? I'm looking at the Q1 earnings.
Nitin: Yeah, they basically extended the maturity. Yeah.
Andrew: But, sorry they extended it past 2024.
Nitin: I'm sorry, the refinancing, they extended the maturity out.
Andrew: Oh, okay. I thought it said maturity in 2024. So I've got it wrong.
Nitin: No, no, no, you're right. It is now so sorry. What I had meant was that they extended the maturities out last year to 24. And their lenders were pretty flexible with them to extend out the maturities. They gave up some equity in terms of warrants, for that maturity extension.
Andrew: What's the strike of the warrants that they gave out?
Nitin: I don't know the answer to that. I don't think it was
Andrew: Ok. I was just wondering.
Nitin: They were pretty much, they we walk through kind of the level of equity that they get. So, my sense is they're close at the money but that's me speculating.
Andrew: Okay. Cool. Cool. All right. So I guess if people are thinking about this, it's like, look, I guess there's a lot of shots that could be potentially multiples here, right? Meta Beacon and potentially Spectrum as well. You've got 2025, hold coded do, and thats you is the big catalyst where, hey, they've got all these shots, they're going to have to realize value for one of them before the 2025, debt comes because that's how they're going to be able to pay off that debt at some point. And that, to you is kind of where the interest and crux and value of this thesis lies.
Andrew: What do you think is the most likely piece for them to realize value? It sounds like maybe Meta Beacon if they get FDA approval and the time match up, right? FDA approval now launches are expensive. You do IPO in early 2024 with FDA approval to fund the launch and prove out the value and push back the whole coda.
Nitin: Nope, I think you're right. And I think the value you have out of that is that you probably Meta Beacon. You probably extract the most, the closest amount to long-term fair value because people know what it is and they know how much potential this has. I think we're just still so early you've done one trial in one small town on Spectrum. I think we're just a little too early on that, right? So there's probably a bigger discount to what the longer-term, value is. I think R2, they need to kind of grow it, right? Because Meta Beacon has some real potential whereas something like R2 people understand the platform potential. I think something like an R2 people need to see the proof of, in the concept, right? And they need to see that through revenue growth, right? Because it is a real product. So again, that's going to take time. So I just think when I, when I look at all of these pieces, I think you probably get the closest to fair value for Meta Beacon. So it's the most likely sale candidate. And I think that's probably because there are also multiple potential buyers of it.
Andrew: Yeah, no, you know, the tough thing with this is just Meta Beacon is really interesting, but, it's like, Hey, R 2 is really interesting. I've been really disappointed by R2 as you said, like the founder had such a great track record, and it's just like, oh, it's, and then Spectrum, and I said this on the first podcast, I remember when Phil Falcon in like 2018 through this altogether, and they're like, spectrum local TV broadcasting. It's the future. And I hear you, like sometimes, unfortunately, the value creation of a business and the value realization does not match the stock price on our screens. And we'd like everything to get fairly valued and instantly play out tomorrow. And like, sometimes these things take years, but I just, like, on Spectrum I've been hearing that story for so long, and I'm like
I almost feel like the time has passed it by, and it's like Meta Beacon to me is the really interesting one, but then I look at R2 and I'm like, I feel like Charlie Brown and Lucy with the football, like they pulled it out once and maybe the value's still there for all too, but like, yeah, I'm getting played again on the same, like the same thesis, you know?
Nitin: Yeah. It's, I mean, you're right though. Like it's, but at the end of the day we're buying it, it's such a large, whether it's at three or one, right? We're buying it at such a big discount to fair value. And I think it's because you have the cover of DBM that it's kind of like,
Andrew: It's the beauty of a highly leveraged HoldCo, right? Like, if you've got one thing in there that can cover all the value like you get a lot of free shots at the upside, and this is a highly, highly leveraged HoldCo
Nitin: Yep. And you're like, okay, fine. This one doesn't work as well as expected, but there's still value to it. That's more than the market cap, right? And I say market cap, because you're, like you said, you're covering all of the EV with everything else. Okay, this one it's still got some value to it, right? And that value is still multiples of the market cap. You then you have this other piece that could be worth a whole lot more, right? And so, again, I still, one person I talked to was like, well, I don't really this is kind of the bear case, right? One person I talked to was like, well, I really don't like it because if you think this thing generates 120, 130 million in EBITDA DBM and let's put six times multiple on DBM all in, you get, $6 or $7 in value when you include the hold code debt and the DBM debt, and you're buying it for three, six, do you really want to take the illiquidity risk and the volatility and all of that for just a double when we don't know when that double is going to come to fruition, right?
And my take on it is, yeah, but you can't value all the other stuff at zero and just consider them, right? Especially when you have such a sliver of market cap. So and yeah, it's dicey. Is it moving around? Yes. Do you position size accordingly? Yes. But that doesn't mean there isn't huge long-term value here.
Andrew: Yeah, no, and look it I think on the first podcast we focused a lot more on DBM, and we did start off with DBM here, but as you said, like DBM is one of the crux, it is a good business. I think reasonable people can argue on just like how good of a business if this is more just like a commodity business where you just kind of slap a low to mid single-digit EBITDA multiple on them. Or I know some people, and I think you're one of them who says, Hey, like, yeah, these guys are steel fabrications. It's not the best business history. But for this large-scale steel fabrication business, they did the Clippers arena. Like there aren't a lot of people who can do this, especially it's a local business, and locally there might only be three players.
You can earn decent economic profits doing that. And you get DBM, it covers everything. And then, yeah, I've been disappointed in some of these moonshots, but you just keep getting them for free. And when one of them pays off, as you said, woof, look, I know you had, go ahead.
Nitin: Nope, that's exactly right. Yeah,
Andrew: I know you have lunch. I actually need to go to the restroom. But look, we also, I know you and I have telecom in common. We've got another refiner that we've been looking at in common. So this has been great. We're going to have to have you back on, sooner than almost two years next time. And, yeah, Chatty, thanks for coming on we'll reach chat soon.
Nitin: All right. Sounds good. Thank you, Andrew. Appreciate it.