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The following segment was excerpted from this fund letter.
Nicholas Financial (NICK) was a sub-prime auto lender that sold their loan book and now has majority ownership in Amplex Internet alongside $40+m of cash to invest. It is our sixth largest position in the fund and now has a market cap of $45m.
As mentioned in the H2 2023 letter, Nicholas Financial announced the sale of their entire loan book to Westlake Financial for $9 per share late last year.
The deal finally closed this April resulting in Nicholas Financial having ~$65m of cash and no debt on the balance sheet.
As I outlined, we would have preferred Nicholas Financial to just return the $9.00 per share to shareholders – recall we bought shares for an average of ~$5.60.
However, Adam Peterson and the rest of the Nicholas Financial team – who own 40+% of the shares – decided the best route for shareholders would be to keep the $65m of cash within Nicholas Financial and put the ~$40m of U.S NOLs and ~$60m of State NOLs to use by acquiring other businesses.
We could have sold our shares at $7 per share (30% below cash on the balance sheet) – the price they were trading after the Westlake deal was announced.
However, after careful consideration and speaking with chairman of the board Jeff Royal, I thought it made the most since to maintain our ownership and invest alongside Adam.
I have gotten to know Adam quite well and he is someone I will continue to happily invest our capital alongside. He has put together an impressive board and team at Nicholas Financial that I trust will make adequate returns on capital – despite the suboptimal size of the company.
It seems that Adam and the Nicholas Financial team already had a capital allocation plan in place well before the Westlake deal closed in April.
As of this June, Nicholas Financial acquired 56.5% of Amplex Internet. Their CEO – Mark Radabaugh – retained the other 43.5% ownership and will stay on as CEO for at least two more years.
Nicholas Financial invested ~$21+m for their 56.5% ownership at a valuation of $37.5m – the numbers mentioned about the acquisition may be slightly off as detailed financials haven’t been released yet.
Amplex Internet is located in Luckey, Ohio and provides broadband internet to business and residential customers in rural northwest Ohio.
Amplex recently started transitioning from fixed wireless internet to building fiber internet to homes. They currently have 9,000 fiber passings and 3,500 fiber customers.
I had a long conversation with Amplex CEO, Mark Radabaugh, and he is a classic entrepreneur who bootstrapped growing Amplex into what it is today with family and friends money, free cash from the company, and small business loans and various other forms of debt – doing anything he could to not dilute his ownership.
Within five minutes of our conversation, it was clear that Mark was not only very knowledgeable about the rural internet industry but very passionate about the company he built.
He described to me how Amplex’s transition from fixed wireless to fiber internet has made financing growth a challenge.
An investment in fixed wireless is inexpensive and the payback period is less than a year. Conversely, an investment in fiber is quite expensive upfront and takes years until it is paid back – but once your fiber buildout matures it provides low maintenance, durable free cash flow for years or even decades.
It has been mentioned multiple times in various of the River Oaks Capital letters how attractive rural fiber internet returns can be if you are the first one to build fiber in an uncompetitive market.
In order for Mark to continue to grow the fiber buildout in his business he needed to bring on an equity partner – it is too dangerous to grow a fiber business with a massive debt load (although some companies are doing just that) – and that is where the Nicholas deal came in.
Mark agreed to partner with Adam and the Nicholas team because he liked how Adam’s team already had experience in rural fiber – through Boston Omaha – and he knows a few of the CEO’s whose companies are owned by Boston Omaha and they spoke highly of working for Adam and his team.
Additionally, he liked how Adam and his team were hands off and allowed him to continue to run his company the way he wanted.
Mark said that if an equity investor had come in an overhauled Amplex Internet it would have been a total disaster as their customers love them for their personalized customer service.
Furthermore, Mark built the business from the ground up and didn’t want to see any of his employees get fired – a testament to his character.
Amplex Internet is still in the early stages of their growth with a penetration rate that should continue to increase alongside growth in their fiber network from the capital provided by Nicholas Financial and a friendly $21m USDA loan – both of which have yet to be used to build fiber.
This capital alone should be enough to more than double their fiber network.
Very basic financials were given during the Amplex Internet acquisition announcement. By using those rough estimates, Amplex is generating ~3+m of free cash flow to equity – which should increase as their penetration rate increases and as their fiber buildout continues.
This means Nicholas Financial shareholders are currently receiving ~$1+m in free cash flow to equity per year – after deducting the fixed costs to run the holding company – from their 56.5% ownership in Amplex Internet.
Additionally, Nicholas Financial should have around $40+m of cash on the balance sheet.
Their financials will become clearer over the next quarter but recall the market cap is only $45m – providing us with a significant margin of safety.
I would not be surprised if Nicholas Financial uses a large portion of the remaining $40m of cash to expand Amplex’s rural fiber footprint.
Moreover, as part of the agreement, Nicholas Financial has the right to acquire 80% of Mark Rudabaugh’s 43.5% remaining interest in two years – which would be another ~$15m of cash.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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