Author Topic: SYTE - Enterprise Diversified  (Read 211908 times)

rkbabang

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Re: SYTE - Sitestar
« Reply #210 on: September 19, 2016, 07:32:42 PM »
What a circus.

The value investing community love throwing stones about shareholder representation and ethics from the outside but once a pot of gold is in sight the average value investor has the same motivations of greed as any other.

This nonsense about a satisfactory end justifying questionable means is the same backwards thinking that prevents people like Biglari from being held to account.

+1
It's always so easy to justify it to yourself. "It's okay when I do it"
:(


IceCreamMan

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Re: SYTE - Sitestar
« Reply #211 on: September 19, 2016, 10:43:32 PM »
I took notes at the meeting yesterday and am posting them below.

Steve Kiel did most of the talking. I missed his opening comments and then he introduced the rest of the board of directors.

He announced that a press release had gone out at 10:30 and read it aloud. It announced a seed investment with Dave Waters' Alluvial Capital.

The rest of the meeting was in the Q and A format.

With the HVAC fund, they're targeting pre-tax ROE of 25% in year 1. This is after the profit share agreement.
Nathan Reid (HVAC) hired a COO.
Steve met Nathan met 6-7 years ago at a Berkshire meeting. Nathan discussed the HVAC idea at this year's Markel breakfast.

Steve said that Sitestar will share in the revenue stream of Alluvial.

With regard to Alluvial, Sitestar must consider 40 Act requirements, which limit investment securities to 40% of assets.

All prior goodwill was attributed to the internet business. Going forward, it will probably be attributed to the HVAC business.

They are continuing to cut costs in the internet business. There was a tiny increase in revenue from Q1 to Q2. There shouldn't be seasonality in the business.

There was a question about why additional domain names were purchased. Steve said that it was to keep the business of customers using e-mail addresses on domains that Sitestar didn't own.
The highest margin revenue is dial-up and e-mail addresses. I think he said that 75-80% margin is typical for dial-up and storage.
first.com is on the books for $200k and Sitestar has received offers above $200k, but they are hoping for more.

DSL and fiber are lower margin, but Sitestar may get revenue growth from these services.

Managers such as Nathan and Dave make their own decisions. Steve is responsible for making decisions on securities in the investment portfolio at the corporate level. Approval for subsidiaries is at the board level.

A question came about the pricing of the capital raise. Steve said that some things about the private placement can't be discussed. The company was not close to reaching a quorum. The SEC would not have approved a rights offering, which requires an S-1 filing. They had met zero out of the five requirements to issue shares electronically. (It sounded like he thought they would eventually meet those requirements.) He said that there would not have been interest from investors at a price above book value after considering the illiquidity and frictional costs of the unregistered shares.

Question about capital structure and leverage. Earn-outs are on the balance sheet as borrowings. Basically, none of the segments use debt. The plan in the future is "to be determined." Sitestar currently has the ability to issue preferred, but it is unlikely to do so because the market would demand interest rates that are too high. The new CFO will go to banks to ask about borrowing against the company's rental properties and see what loans are available.

Question about corporate expenses run rate. Q2 was "out of control." He wants the company "as lean as possible" but "run like a public company" (I think with regard to audit and filing expenses). The company hired a consultant to advise on internal controls. The new CFO can do some of the accounting work that was outsourced.

Question about how the company will use the HVAC cash flows. Steve hopes to reinvest them. Investment opportunities are good because sellers of HVAC companies are limited in their choices of buyers.

Compared to when he joined the company, Steve is more optimistic about the internet business and less optimistic about the real estate.

Question about return hurdles or targets for investment securities portfolio. Steve avoids these because he thinks that they could change and feels that investing is more of an art than a science.
Question about conflict of interest from managing outside money in addition to Sitestar's portfolio. He says that Sitestar's portfolio currently consists of two holdings that are highly liquid and low risk, and therefore would not be suitable holdings for any of the outside partnerships that are being managed. Policies will be put into place for the board of directors to prevent conflicts of interest.

Question about performing shareholder activism on stock holdings. He wants Sitestar to be known for solving problems. Maybe provide resources along with investments. But not a white knight like Berkshire. Sometimes there will be opportunities to help investee companies. He sees optionality in buying private companies.

Steve says he aspires to the "Outsiders" companies: centralized capital allocation, decentralized operations, and a familial culture.

I got the impression that Sitestar's management team isn't allowed to solicit for the newly announced private placement. If you're interested in participating, it may be a good idea to contact management for further information.

InelegantInvestor

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Re: SYTE - Sitestar
« Reply #212 on: September 20, 2016, 06:38:46 AM »
I took notes at the meeting yesterday and am posting them below.

A question came about the pricing of the capital raise. Steve said that some things about the private placement can't be discussed. The company was not close to reaching a quorum. The SEC would not have approved a rights offering, which requires an S-1 filing. They had met zero out of the five requirements to issue shares electronically. (It sounded like he thought they would eventually meet those requirements.) He said that there would not have been interest from investors at a price above book value after considering the illiquidity and frictional costs of the unregistered shares.


Thanks for the notes. The repeated claim by Mr. Kiel that there would not have been interest at a higher price is dubious. As it is, the vast majority of the placement was taken up by Kiel through Arquitos and Santa Monica Partners. How was this conflict cleared to arrive at a fair value and avoid self-dealing?

roark33

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Re: SYTE - Sitestar
« Reply #213 on: September 20, 2016, 08:41:24 AM »
My legal background tells that not being "allowed" to disclose details of an already completed private placement is complete BS. 


LR1400

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Re: SYTE - Sitestar
« Reply #214 on: September 20, 2016, 11:36:29 AM »
What total size are they talking about for the HVAC rollup?

Poor Charlie

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Re: SYTE - Sitestar
« Reply #215 on: September 20, 2016, 12:08:09 PM »
So beyond all of the obvious problems, no ownership of the GP? Just passive investment as LPs, paying the manager a fee?  Apparently by "asset management business" SYTE means that it will be paying fees to asset managers.

Although Sitestar isn't getting an equity stake in the GP, it is getting a portion of the management fees generated by the fund, according to a letter that Alluvial sent to its clients.

Was this information in one of the Alluvial quarterly reports?  I'm curious if it's a percent of revenues or percent of profits?  Also curious to know the total amount of capital they're looking to raise and what the incentive fee arrangement would look like?  Thanks!

KJP

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Re: SYTE - Sitestar
« Reply #216 on: September 20, 2016, 12:17:58 PM »
So beyond all of the obvious problems, no ownership of the GP? Just passive investment as LPs, paying the manager a fee?  Apparently by "asset management business" SYTE means that it will be paying fees to asset managers.

Although Sitestar isn't getting an equity stake in the GP, it is getting a portion of the management fees generated by the fund, according to a letter that Alluvial sent to its clients.

Was this information in one of the Alluvial quarterly reports?  I'm curious if it's a percent of revenues or percent of profits?  Also curious to know the total amount of capital they're looking to raise and what the incentive fee arrangement would look like?  Thanks!

The information was in a letter to clients sent out yesterday.  The letter provided no additional information on the issues you mentioned.

Sunrider

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Re: SYTE - Sitestar
« Reply #217 on: September 20, 2016, 12:56:22 PM »
A somewhat simple question on the dilution point - there are 100 shares and the book value is $100, assume all in cash. Management raises new funds to invest in [hedge fund] or [toilets] or [mars greenhouses]. The total size is 1000 shares for $1000.

Effect immediately after:

1100 shares with cash book value (=equity value) of $1100.

No dilution - but of course investing that cash into [] may or may not be a good use of funds.

... just wondered why people complain about 'dilution' for the Alluvial raise - shares get issued for cash, which accrues to equity value, so that's not really dilution, no?


InelegantInvestor

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Re: SYTE - Sitestar
« Reply #218 on: September 20, 2016, 01:02:38 PM »
A somewhat simple question on the dilution point - there are 100 shares and the book value is $100, assume all in cash. Management raises new funds to invest in [hedge fund] or [toilets] or [mars greenhouses]. The total size is 1000 shares for $1000.

Effect immediately after:

1100 shares with cash book value (=equity value) of $1100.

No dilution - but of course investing that cash into [] may or may not be a good use of funds.

... just wondered why people complain about 'dilution' for the Alluvial raise - shares get issued for cash, which accrues to equity value, so that's not really dilution, no?


Perhaps I'm being imprecise but I've been referring to dilution of my voting power, which has been quite significant.

Tim Eriksen

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Re: SYTE - Sitestar
« Reply #219 on: September 20, 2016, 01:23:31 PM »
A somewhat simple question on the dilution point - there are 100 shares and the book value is $100, assume all in cash. Management raises new funds to invest in [hedge fund] or [toilets] or [mars greenhouses]. The total size is 1000 shares for $1000.

Effect immediately after:

1100 shares with cash book value (=equity value) of $1100.

No dilution - but of course investing that cash into [] may or may not be a good use of funds.

... just wondered why people complain about 'dilution' for the Alluvial raise - shares get issued for cash, which accrues to equity value, so that's not really dilution, no?

In the case of all cash you are correct.  There is no dilution.  The reason that there is no dilution is not that the issuance is at book value, it is that intrinsic value and book value are "identical" in your scenario.  That is rarely the case.  If you believe intrinsic value is substantially higher than book value you will believe you are being diluted.  The challenge with Sitestar is what is/was intrinsic value as a going concern?  What is/was it in liquidation?  What is it after the HVAC deal?  What is it after the Alluvial deal?