Maglan Capital increased in value by 4.24% (net of all fees) during the month of March.
For 2015, Maglan Capital has increased 14.14% (net).
In the most recent 3 years, Maglan Capital has averaged an annual gain of 52.48% (net).
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March was another strong month for Maglan, closing a solid first-quarter for the fund. Our position in Globalstar (GSAT) was the largest contributor to performance in March. Over the past few weeks, Globalstar has emphatically continued its march toward FCC approval of its terrestrial low-power service (TLPS) initiative, which will open the company to a myriad of opportunities in the current explosive communications environment. More broadly, the largest players in the technology and communications industries have exhibited unremitting appetite for communications spectrum and the scope of their vision has expanded, unabated.
Maglan Capital: Volatility and Risk
Maglan’s first-quarter strength is largely a result of catalysts and events relating to our core investments, that the market had to recognize, coupled with relatively calm broader markets. As important as the fundamental progress, the outperformance that the fund exhibited in the first-quarter was augmented by Malgan’s deep-discount buying, in the fourth-quarter of 2014, of already-core positions.
As the broad markets swooned in the last months of 2014, as detailed in our monthly investor letters for September 2014 through December 2014, solid, fundamental progress was being achieved in our core positions. Nevertheless, as the tide of the market forcefully washed out-and-in with regard to mega-cap investments, Maglan’s world of small- and mid-cap investments was swept out to sea without immediate return. So, we took advantage of the environment and added to our highest conviction investments at lower prices. Our investors are now reaping the gains of those convictions and investment additions. And, we expect that Maglan will continue to garner those rewards throughout 2015, as significant investment-related catalysts transpire.
Like others, we don’t prefer volatility. Nevertheless, volatility is in the nature of our investment environment, so we must expect it. More importantly and valuably, when we’re able, we anticipate it and capitalize on it. It is the contrarian discipline of investing and buying at those times of fear and market dislocation that fuels Maglan’s outsized returns. Said another way, our ability to distinguish between volatility and risk is one of Maglan’s defining traits.
Maglan Capital: Globalstar (GSAT)
In 2015 thus far, Globalstar has made significant progress toward FCC approval of its TLPS initiative. Once approved, we expect that Globalstar will begin to showcase the value of its spectrum through discussions and actual transactions with licensees, joint-venture partners and acquirors. In addition, Globalstar will immediately begin the processes necessary to duplicate the FCC’s approval in as many viable jurisdictions worldwide. The FCC approval of Globalstar’s TLPS initiative is occurring at a remarkably busy and exciting time for the technology and communications industries. Globalstar’s spectrum continues to be an increasingly important and valuable piece to the puzzle of the future of wireless communications.
Maglan Capital: FCC Approval
We view the FCC’s process of solicitation and consideration of external comments, opinions and evidence as it relates to Globalstar’s TLPS initiative, as entirely complete.
In early March, Globalstar conducted demonstrations of its TLPS for the benefit of the FCC and certain industry opponents, particularly, special interest groups.1 The focus of the demonstrations was on whether TLPS activity creates interference with other communications activity, whether TLPS is compatible with existing wireless equipment, and whether TLPS creates increased throughput/network efficiency. From all of the reports filed to date, by Globalstar, the FCC and Globalstar’s opponents, the results of the demonstrations were very favorable to Globalstar.2 Some of the conditions simulated in the demonstrations were harsher than reality, and nevertheless, Globalstar’s TLPS succeeded.
The FCC is now poised to turn its attention to confirming Globalstar’s TLPS initiative, since the FCC’s Office of Engineering and Technology (OET) and the FFC’s International Bureau have recently completed the bulk of the work related to the AWS-3 spectrum auction and Net Neutrality. The OET, as expected, has filed a factual ex-parte filing summarizing Globalstar’s recent tests.
Maglan Capital: Company’s Offense against Back-Pedaling Industry Opponents
Globalstar has faced opposition from special-interest and industry groups, whose existence is predicated on preventing or inhibiting outside competition and who are incentivized to say almost anything against Globalstar’s initiative, with the aim of torpedoing or slowing down the FCC approval process. These opponents have little to almost nothing to lose in their attacks; similar to the incentive calculus of a common fear-monger or terrorist. In stark contrast, Globalstar has conducted itself professionally with long-term interests in mind, advancing its case with the FCC.
As a part of Globalstar’s recent FCC testing, opponents had multiple days to view and comment on the demonstrations. Not only have some opponents failed to comment as they indicated they would, some opponents did not attend the demonstrations at all and others departed the demonstrations prior to the conclusion and did not return. Since then, some opponents have publicly complained about the setup of Globalstar’s demonstrations, which the opponents agreed to prior to the commencement of the demonstrations. Other opponents have expressed that they will not file their concerns until mid-April, without any additional detail, seemingly just looking to stall Globalstar’s progress.
Although we have never been able to influence or confine the timing of the FCC’s approval of Globalstar’s NPRM, all the recent events indicate considerable progress. The company has been very responsive to claims made by opponents in the aftermath of the FCC demonstrations,3 and since the conclusion of the early-March demonstrations, the OET has made no additional requests for technical analysis. FCC Chairman Tom Wheeler has shouldered a lot of political and industry pressure in connection with the FCC’s push for Net Neutrality and with respect to the broadcast incentive auction delays, and the Commission could use a deserved victory related to freeing-up spectrum. Approving Globalstar’s NPRM would be a great victory for the FCC because it would release 22MHz of nationwide spectrum that can be deployed and used in the near-term.
Specifically, we expect that the FCC has internal deadlines that it intends to reach. We expect that the proceeding will close shortly with Globalstar’s NPRM put on the agenda for an open-meeting in the upcoming months, or approval will be delivered via circulation, dispensing with the open-meeting route. As we have stated previously, the only question surrounding approval is “When?” Approval itself is foregone conclusion.
Maglan Capital: After Approval, What’s Next for TLPS
After FCC approval, Globalstar will immediately commence an effort to address international markets and to apply TLPS as prolifically as professionally possible. Many international communication regimes take their cue from the FCC. Moreover, the US State Department has indicated that it would like to see the United States take the lead on repurposing the ISM band globally for Wi-Fi TLPS, and therefore, it supports advancing TLPS internationally after the FCC’s approval. We expect that although applications for many countries may be filed within proximate time, approval of Globalstar’s TLPS in Canada and Mexico will follow first and shortly after US TLPS approval. In addition, generally, international approval will be considerably faster than the FCC’s in the United States because, with the current proceeding, the FCC has laid the groundwork for TLPS-related diligence and vetting for regimes outside the US and the FCC’s instant process can be used as a template. Most important, from a valuation perspective, global authority for TLPS would of course materially enhance Globalstar’s value; over the long term, the value of the international TLPS approval will match, if not exceed, the value of the approval in the U.S.
Maglan Capital: After Approval, What’s Next for GSAT
After FCC TLPS approval, we expect that the company’s thoughts around and discussions with potential licensees, joint-venture partners and acquirors will begin to be publicized. We would not be surprised to see Globalstar hire strategic advisors to evaluate the possible avenues toward value-creation and monetization. Potential counter-parties include many large and exciting entities, which may have vast and differing opportunities to offer for the future of TLPS, including AT&T, Comcast, Cablevision, Google, Apple, Amazon and more.5 Those opportunities could yield incredible value for Globalstar.
Maglan Capital: Globalstar’s Shorts and Trading Technicals
To the company’s credit, Globalstar has remained laser-focused on the FCC approval process and the underlying business, not on battling short-sellers. Over time, the market has recognized that the short-sellers have presented a weak collection of arguments.
The cost to borrow Globalstar shares has risen materially to as high as 25%+. Recent readings have placed the total short-interest at approximately 60mm shares, and even through March’s stock appreciation, the short-interest has been reduced only minimally.
With regard to the actual arguments by the short-sellers, the short-sellers have been bobbing-and-weaving around the inevitable TLPS approval, which they originally argued would never come because of interference issues, which now everyone knows don’t exist. Now, the short-sellers are trying to refocus on the commercial viability of TLPS.
The short-sellers have used the FCC docket like a stock message board, posting any opinion, no matter how wrong, damaging or misleading.7 In response, other supportive shareholders have written letters to the FCC against the short-sellers’ tactics.8 Generally, public short-sellers plan their attack while a company is most vulnerable. In this case, the company’s FCC process is Globalstar’s highest priority, by far, and the company should do nothing that could possibly upset that process. Correctly, the company has sacrificed a short-term gain in upending the claims of short-sellers, in favor of the longer-lasting and more valuable TLPS approval.
Maglan Capital is an event-driven investment fund with a concentrated portfolio of investments across the capital structure of small- and mid-cap companies with core focus on financial distress, restructuring and operational turnaround.
We appreciate your support and confidence in our team.
Steven Azarbad, Chief Investment Officer
David D. Tawil, President