During his recent interview with Tobias, Joseph Boskovich, Co-Founder and Partner at Old West Investment Management, discusses one of the best investors you’ve never heard of – Howard Jonas. Here’s an excerpt from the interview:
Tobias Carlisle: I’ve got you. Right. So the next biggest position is RFL, Rafael. Talk to me a little bit about that position.
Joe Boskovich: Yeah. It’s grown into a big position. I actually just was listening to your podcast with Ian Cassel a couple of weeks ago, and both of you make some great points about trimming your winners too early. So at some point, I think we would trim back that position, but don’t want to do it prematurely. I think there’s a lot of potential there. But our investment in Rafael, it’s really more of an investment in someone that we think is a great owner-manager. His name is Howard Jonas. And it’s funny, if you look at the investment landscape… Imagine if you built a portfolio where you identified great owner-managers and capital allocators and you kind of invested alongside them, so think of someone that invested with John Malone 30 years ago and kept all of his spins and really watched him closely, you’ve done very well. Imagine how you invested alongside of Warren Buffett for the last 50, 60 years. You’ve done very well.
Tobias Carlisle: Bill Stiritz.
Joe Boskovich: Yeah, Bill Stiritz, exactly, so any of those people profiled in The Outsiders, right? Howard Jonas is less known. I think he has a phenomenal track record, and I think that people are going to know more and more about him as time goes on. So Howard started a company called IDT Corporation in 1990. IDT, they are in the communications and payment-services business. They’ve done a great job managing that business, but they’ve also talked about how the international minutes business has been in decline from free VoIP providers like Skype, which we’re using right now, or WhatsApp. So what they’ve done at IDT is they’ve effectively managed IDT’s cost structure, and they’ve maximized that cash flow, and they’ve taken the cash from the legacy business, and they’ve effectively bought a basket of growth initiatives within IDT.
Joe Boskovich: There are still several growth initiatives still within IDT, but a lot of those they’ve spun off. So if you look at Howard’s track record… And like I said, he started IDT in 1990, but if we just start in January, 2010, since January of 2010, Howard has spun off five different businesses from IDT, and he sold the sixth, after which he paid a special dividend. But he spun off IDW Media, which… We could talk about all of these. I could talk about each one for an hour if you’d like, but he spun off IDW Media in 2011. I think the next spin was Straight Path Communications, which a lot of people will… That name will resonate with a lot of people because that was one of his big exits.
Tobias Carlisle: Well, why don’t you tell us the Straight Path Communications story?
Joe Boskovich: Yeah. So one thing that I’ve found with Howard is Howard, he’s a great visionary in terms of identifying secular growth stories. What’s going to be the big thing tomorrow? So the first company I mentioned, IDW Media, he bought that company in the 2000s. It’s the fourth largest comic-book company in the world, which is misleading because 99% of comic-book sales are Marvel and DC, so it’s a very small base. But he bought that company, and then he took some of the cashflow that the comic-book company was generating and invested it in the television production business, and this was in 2009. Anyways, they have three shows that will be premiering in Netflix in the next six months.
Joe Boskovich: But once again, when I talk about a secular growth trend, I think he’s identified streaming, and valuable content is going to be in high demand. And I actually listened to your bit recently on Netflix as a short position. We’re short Netflix, too. I think the world of streaming, the companies like Netflix are going to get hurt. The companies that are going to do very well are the owners of valuable content like an IDW Media.
Joe Boskovich: So anyways, he spun off IDW Media. The second spin was Straight Path Communications. Once again, I think he identified a secular growth trend, so in 2001, Howard basically bought a hodgepodge of spectrum licenses off One Star Communications out of bankruptcy, and this was in 2001. He paid $50 million. He bought that under the IDT umbrella, and then he, 12 years later, spun off that hodgepodge of spectrum licenses into a company called Straight Path Communications. Well, last year, there was a bidding war between AT&T and Verizon, and Verizon ultimately won and paid $3.1 billion for Straight Path Communications, and Howard Jonas owned 20% of the company, so that was obviously a big exit. He had a big billion-dollar exit earlier on in his career.
Joe Boskovich: So post Straight Path, he spun off Zedge. We are actually the largest shareholder of Zedge. We own 15% of the company. That’s an exciting asset. And then most recently, he spun off Rafael Holdings. So Rafael Holdings, that’s a holding company. He spun it off from IDT with cash, about $50 million of cash, real estate, which has a book value of $50 million, and that’s IDT’s headquarters, and then two stakes in bio-pharma assets. So the most exciting would be a 56% interest in a company called Rafael Pharmaceutical. And Rafael Pharmaceutical, they’re basically developing therapies for difficult-to-treat cancers based on the AMD platform, which is altered cell metabolism. So you have chemotherapy. You have immunotherapy. Well, the AMD platform, the medicine is designed to target the mitochondria of just the cancer cells and leave the healthy cells alone, so you don’t have the same side effects that you do with chemotherapy.
Joe Boskovich: But anyways, what’s interesting, when it was first spun, it had a hundred-million-dollar market cap, which was basically equal the book value at the time, and you have this option stake in these pharmaceutical companies, which have had tremendous results in Phase 1 trials. They now have two drugs in Phase 3 trials. The one they’re most excited about is a Phase 3 trial for pancreatic cancer. In phase 1 trials, they treated 15 patients, and three of those patients are in complete remission, and this is a cancer where their survival rate is less than 1%. So it’s a little bit of a, I guess, a speculation on the bio-pharma side, but keep in mind that this was spun, and we’re basically getting real estate and cash, and that was equal to the market cap at the time.
Tobias Carlisle: Yeah. So you get free options in those two, basically.
Joe Boskovich: Yeah. And then since then, the stocks run, so that’s not necessarily still the case, but this is… Howard Jonas is the chairman of the company. He is largely funding the company through trials. When he originally got involved… As you know, with early-stage tech and biotech, you might have a great technology, but you fall short of the finish line, and you run out of money. So Howard was kind of that capital injection, and in return has this 56% majority stake in the company through IDT. And he’s all in, and he’s spending a great deal of his time on this company. It’s somewhat of a bet on Howard Jonas, but several things have happened over the last six months that I also think kind of de-risk the investment. They just signed a big deal with Ono Pharmaceutical in Japan, where they are going to market that drug in Japan, and they’re going to pay Rafael a low double-digit royalty on sales. And they just announced trials in Israel and parts of Europe, so I think as they do that, it also de-risks the investment from an FDA decision in the United States.
Tobias Carlisle: Got it. So let’s just go back to IDW. What are the comic-book characters that it has, and what are the shows that are coming up?
Joe Boskovich: Yeah. This has kind of been a long-term investment for us, and there were some stumbling blocks in the road, but as I mentioned, Howard bought IDW Publishing in the early 2000s. In 2009, it was paying a small dividend. In 2009, he canceled that dividend and invested the cash and taking its IP and turning it into television shows. They had two shows pretty early on. They had a show called Wynonna Earp, which was based on one of their comic-book characters, and that was on Syfy. And then they had Dirk Gently on BBC America. Wynonna Earp is going on season four. Dirk Gently was canceled after season two. And there’s kind of been this lull where there’s been nothing lately.
Joe Boskovich: They have had three shows picked up for Netflix. So V-Wars and October Faction will both premiere on Netflix before the end of the year, so in calendar year 2019. And then their best-selling IP ever is Locke & Key, which was written by Joe Hill, Steven King’s son. And that was picked up by Netflix and will premiere in early 2020. So what’s interesting is once again… And one thing that I didn’t mention earlier, so we look for companies run by owner-managers. We want to buy into that asset at what we think is a reasonable price. But then third, I think, if you could identify a company where there’s a breakout business, I think that’s very interesting because, as we know, if you’re a value investor, you could buy things that are cheap, but usually things are cheap for a reason, and that’s because no one wants to own them.
Tobias Carlisle: Right.
Joe Boskovich: So if you could identify some sort of catalyst, and that could be a hard catalyst or a soft catalyst. But if you could find a business where there’s this breakout business where revenue is going to grow significantly, maybe that could be the catalyst. In IDW Media’s case, right now, if you looked at the income statement, all of the revenue is generated by the publishing business. Well, so entertainment was generating revenue before Dirk Gently got canceled. Then there was kind of an interruption with Wynonna Earp, but the company has already said that V-Wars and October Faction, those two shows will contribute $27 million in new revenue to the entertainment division in the fourth quarter or in the end of the year here. And then Locke & Key is done on a producer fee, so it’ll be $2.5 million licensing fee from Netflix in revenue, but that’ll go directly to the bottom line. And then Wynonna Earp is about $8 million in revenue.
Joe Boskovich: So here you have a company that if you look last quarter or the last calendar year at the income statement, the entertainment division is doing zero, and the entertainment division is going to be doing $35 to $40 million in the next 12 months. So once again, this is a business where everybody’s focused on the publishing asset, but there’s this entertainment asset that’s going to have significant income state contribution in the future.
Tobias Carlisle: How material is that to IDW?
Joe Boskovich: IDW, it’ll double its revenue.
Tobias Carlisle: Right. Wow!
Joe Boskovich: Yeah, so that’s interesting. And once again, I think that you need to underwrite every investment separately, but IDW Media, Zedge, Rafael, IDT, I don’t know that we would be invested in any of these businesses if it weren’t for Howard Jonas. And we’ve taken a lot of time in studying him, reading about him, meeting him, spending time with the management teams of the different companies to feel very comfortable. But once again… I mentioned all these spinoffs. So had you invested in the IDT Corporation in January of 2010 through today, if you were invested in IDT plus all the spin-cos, your compounded return is about 50% per year…
Tobias Carlisle: Wow!
Joe Boskovich: … versus 10% for the S&P 500. So I think the results speak for themselves, and if you look at what he’s done and his successes, it would suggest that a closer look at his actions is warranted.
Tobias Carlisle: Well, who is he? I’ve never heard of the name before. Where does he come from?
Joe Boskovich: Yeah. Well, it’s funny, and most people haven’t. Most people haven’t. But like I said, he didn’t just emerge recently. He started IDT in 1990, and he’s built a great business. Really, what he did is… Think of the international callback. He basically pioneered that business. And then he’s constantly… The company has morphed to keep up with the times. And then you think back calling cards, remember when you would use calling cards, IDT kind of pioneered that.
Tobias Carlisle: Like the prepaid card?
Joe Boskovich: Yeah, yeah. They pioneered that business, and he’s continually… In the early 2000s, he talked about how he felt the telecom business had become too commoditized, so he bought a small children’s programming studio and basically built the company called IDW Entertainment. He built IDW Entertainment over a series of years. And in 2005, he sold IDW Entertainment to John Malone of Liberty Media for $500 million, and that was kind of his first.. one of his first big successes. And then he took that cash from selling that business to John Malone and invested it in a lot of these other growth initiatives.
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