Nicholas Free/E+ via Getty Images
The following is an excerpt from This fund letter.
Nicholas Financial (Nasdaq:Nick) was a subprime auto lender that sold its loan book and now owns a majority stake in Amplex Internet and has more than $40 million in cash. We will invest. This is our sixth largest position in the fund and currently has a market cap of $45 million.
As noted in its H2 2023 letter, Nicholas Financial announced late last year that it would sell its entire loan balance to Westlake Financial for $9 per share.
The deal finally closed in April of this year, leaving Nicholas Financial with approximately $65 million in cash and no debt on its balance sheet.
As mentioned earlier, we only wanted Nicholas Financial to return $9 per share to shareholders, and remember that we bought shares at an average price of $5.60.
But Adam Peterson and others The Nicholas Financial team, which owns more than 40% of the stock, determined that the best course of action for shareholders was to retain the $65 million in cash within Nicholas Financial and use the approximately $40 million in U.S. NOLs and approximately $60 million in state NOLs to acquire other businesses.
We could have sold our shares for $7 per share, the price after the Westlake deal was announced (30% below the cash on our balance sheet).
However, after careful consideration and discussions with our Chairman of the Board, Jeff Royal, we felt it made the most sense for us to maintain our ownership and invest alongside Adam.
I’ve become quite close with Adam and am happy to continue to invest capital with him. He has assembled a great board and team at Nicholas Financial that I believe will deliver a substantial return on capital, despite the company’s less-than-optimal size.
Adam and his team at Nicholas Financial appear to have already been drawing up capital allocation plans long before the Westlake deal closed in April.
As of June of this year, Nicholas Financial had acquired 56.5% of Amplex Internet. The company’s CEO, Mark Radabaugh, will retain ownership of the remaining 43.5% and plans to remain as CEO for at least another two years.
Nicholas Financial invested approximately $21 million or more to acquire a 56.5% ownership stake at a valuation of $37.5 million. The figures cited for the acquisition may be slightly inaccurate as detailed financials have yet to be released.
Amplex Internet is based in Lucky, Ohio, and provides broadband internet to businesses and residential customers in rural northwest Ohio.
Amplex recently began the transition from fixed wireless internet to building fiber internet to the home, and now has 9,000 fiber connections and 3,500 fiber customers.
I had a long conversation with Amplex CEO Mark Radabaugh, who is a quintessential entrepreneur who used capital from family and friends, free cash from the company, small business loans, and various other debt to grow Amplex to what it is today, and did everything he could to avoid diluting his ownership.
Within five minutes of our conversation, it was clear that Mark was not only extremely knowledgeable about the local Internet industry, but also incredibly passionate about the company he had built.
He explained to me how Amplex’s transition from fixed wireless to fiber optic internet made it harder to raise capital for growth.
Fixed wireless investments are inexpensive with payback periods of less than a year, while fiber optic investments have a much higher upfront cost and take many years to pay for themselves, but once fiber optic builds are mature, they require less maintenance and provide perpetual free cash flow for years or even decades.
It’s been mentioned many times in various River Oaks Capital letters how attractive the returns on rural fiber optic internet can be if you build fiber first in an uncontested market.
Mark needed to get an equity partner in order to continue expanding the fiber build out of his business. Expanding fiber while taking on a lot of debt is too risky (although some companies do just that). That’s where the deal with Nicholas came in.
Mark agreed to partner with Adam and the Nicholas team because he liked that Adam’s team already had experience with rural fiber through Boston Omaha, and Mark also knew several CEOs of Boston Omaha-owned companies who also valued working with Adam and his team.
I also liked that Adam and his team were hands-off and allowed him to continue running the company the way he wanted to.
Mark said that if equity investors had gone into the refurbished Amplex Internet, it would have been a total disaster as customers were happy with their personalized customer service.
Additionally, Mark built the business from the ground up and didn’t want to see any employees laid off, which is a testament to his character.
Amplex Internet is still in the early stages of growth, and penetration is expected to continue to increase as it grows its fiber network with capital provided by Nicholas Financial and a favorable $21 million loan from the USDA, neither of which has been used to build fiber yet.
This funding alone should be enough to more than double the fiber optic network.
The Amplex Internet acquisition announcement provided some very basic financials: According to these rough estimates, Amplex is generating over $3 million in free cash flow to shareholders, and this should increase as penetration rates increase and fiber buildout progresses.
This means that Nicholas Financial shareholders currently receive approximately $1 million or more in free cash flow per year from their 56.5% ownership of Amplex Internet, after deducting the fixed costs of running the holding company.
Additionally, Nicholas Financial should have around $40 million or more in cash on its balance sheet.
The company’s financial picture will become clearer in the next quarter, but remember that its market cap is just $45 million, which gives us a large margin of safety.
I wouldn’t be surprised if Nicholas Financial uses most of its remaining $40 million in cash to expand Amplex’s rural fiber optic network.
Additionally, as part of the agreement, Nicholas Financial has the right to acquire 80% of Mark Rudabaugh’s remaining 43.5% interest within two years, for an additional cash consideration of approximately $15 million.
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
Editor’s Note: This article features one or more microcap stocks. Please be aware of the risks associated with these stocks.
