Activist Short Selling Can Be Very Profitable

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During his recent interview with Tobias, Sahm Adrangi of Kerrisdale Capital discusses his successful activist short position in Globalstar. Here’s an excerpt from the interview:

Tobias Carlisle: Well, this firm is a pretty big firm. They put a 100 million dollars into this. So they did extensive due diligence, including sending an analyst to China who took them to a forest and showed them the forest. But they didn’t own it. So that’s a trap that you have to be careful of. So, more recently, possibly the thing that you have been best known for is the telecommunications was global star. Do you want to tell the Globalstar story?

Sahm Adrangi: Sure. Yeah. Global Star has probably been my favorite campaign outside of the Chinese frauds. In this business, sometimes you find shorts that you’re very excited about, and you feel like you’ve definitively proven that it’s towards zero. And then other situations, like much of investing, you based on your diligence, you think that you’re probably right. And if you’ve done your work, you usually are, but you don’t have that same level of conviction as other situations. Global Star was an exciting one for us because the company was trading at $5 billion, enterprise value, four and half billion dollars market cap.

Sahm Adrangi: And we felt that we proven definitively that the stock was worthless. Which was just very exciting, and our thesis really was not there in any way, shape or form. It wasn’t on any websites. Because nobody had really done the level of work that we’d done and come to our conclusions. So we got so excited by it. We made it a large position. And, this was a year and a half after Bill Ackman’s Herbalife campaign, and I sort of watched that just as part of studying what other short activists were doing. And so we decided to rent the same auditorium, the same live streaming firm, and we even created the same website, his website was talked about Herbalife. We created a website called Facts About Global Star, which is still alive.

Sahm Adrangi: And, I gave a three or four hour presentation on why this company spectrum was worthless. And that’s really what the company’s four and a half billion dollar valuation is based on sort of the spectrum value. And, it was a really exciting one for us as sort of to this day, the only other life, the only life presentation we’ve given, I think us and Ackman are really the only two firms that have rented out our own auditoriums for our own presentations. I mean there’s folks that go onto these conferences, Robin hood, Aranson, and present amongst many other speakers, but it certainly takes… There’s another level to just rent your own auditorium, create your own event, and it was an exciting one. And-

Tobias Carlisle: Well it worked. But do you remember the thesis?

Sahm Adrangi: Yeah, so in the case of Global Star, it basically had spectrum. So it’s a satellite company, and many of these satellite businesses oftentimes end up being worth more for the spectrum than the actual satellite business. Satellite connectivity continues to lose ground to terrestrial competition, and Global Star made phones that could be used in places where you can get cell phone connectivity. But nowadays, outside of… If you’re hiking in really remote areas, you’re going to get Verizon AT & T, or T-mobile signals, just about everywhere. You don’t need a special phone.

Sahm Adrangi: And so, whereas these satellite companies have to spend billions of dollars to launch these satellites into space to serve ever shrinking markets. And on top of that Global Star was sort of the worst provider relative to its peers. And so the satellite business was just not worth very much, certainly not worth four or five billion dollars, but the spectrum that it was using for part of it’s wireless operations, is in the sort of the 2.4 starting to get 2.495 gigahertz band I think. And that’s sort of roughly around where springs 2.5 gigahertz spectrum is. And in some of the other LTE bands, the other bands that do those pairs you use for LTE.

Sahm Adrangi: And so there was just sort of very basic thinking out there that the spectrum was potentially very valuable, worth billions of dollars. But, it wasn’t, because it’s not simply about the location of your frequencies. It depends on who your neighbors are, who you’re sharing the spectrum with, the width of it, how it sort of plays into current wire, the current wireless generation, upcoming wireless generations.

Sahm Adrangi: And for a variety of reasons, Global Star spectrum, which was getting $4 billion was actually worth nothing. Then the main reason is the same reason that Light Squared has gone bankrupt multiple times. At the end of the day, it has the wrong neighbors, Light Squared Spectrum had GPS as its immediate neighbor. And so there was interference between its bands. Had it been enabled for a cellular communication and the GPS frequency is immediately adjacent to it. In the case of Global Star it was immediately adjacent to Wifi. And so if it was ever converted to high power cellular usage, it would cause an offense with the immediately neighboring Wifi. And so this spectrum was just never going to get out to anything, because you have the wrong neighbors.

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