Otello's stake in Bemobi trades at ~1.5x EBITDA on a look-through basis, despite growing double digits in SaaS/Payments with ~30% EBITDA margins and a new board committed to maximizing SH value
Tremendous writeup. And timely for those of us who've missed out on the Brazil rally so far. I've bookmarked for a second and third read.
Curious what you think of the Nowegians and Brits who replaced Otello's board. Any growth investors among them, or only corporate raider types? Does "strengthening our ownership engagement" mean they're about to push for a large distribution from Bemobi's cash pile, and would doing so affect Bemobi's growth or cap our long run upside in any obvious way?
Thanks Metroid, appreciate it! I don’t have much more insight on the new board other than their bios from LinkedIn and on Otello’s website here: https://www.otellocorp.com/ir/board-of-directors. For whatever it’s worth, one of the podcasts I linked in the write-up was produced by an individual who previously worked with Silje Augustson (one of the new board members) - He speaks of her briefly in the podcast in a favorable light, mentioning her dedication and integrity/shareholder focus.
Overall, they seem less like growth investors - As mentioned, it seems like their primary goal is reducing costs and maximizing shareholder value at the Otello level.
It’s unclear at the moment exactly what "strengthening our ownership engagement" means - I could see it potentially referring to larger cash distributions from Bemobi (Bemobi doesn’t need the excess capital in my opinion - You can see the large cash balance has been a constant since IPO), but could also simply mean working with Bemobi management to better highlight their story in the Brazilian stock market and drive a rerating. We’ll have to wait and see for further disclosures, but I’m glad to see a new board here pushing for something to be done.
Hopefully that helps - Let me know if any other questions.
Hey Zabeel, thanks for reading and appreciate the comment. I mentioned this in another comment, but I don’t know if selling the Bemobi stake immediately would necessarily be the right capital allocation choice given Bemobi’s accelerating Payments growth and low valuation in Brazil. I posted a note earlier (if you haven’t seen it: https://substack.com/@rohansoor/note/c-102934023) that highlights the strength in the most recent quarter - I would expect Bemobi growth to continue strongly in FY25E as utilities, telecoms, and customers from new verticals (education, ISPs, etc.) continue to ramp.
You raise an interesting question - I don’t think Otello needs to exist over time, but a few reasons to keep the entity as is for now (vs. distributing shares) come to mind: First is the wide discount that Otello trades vs. Bemobi. For now, using dividends from Bemobi to buyback Otello shares at a large discount is a prudent form of capital allocation that is currently highly accretive. This is a bit circular - Otello’s discount to Bemobi would presumably completely collapse if Bemobi was immediately distributed to shareholders, but the current strategy allows Otello to increase its Bemobi stake per Otello share over time while (hopefully) still helping to close the discount. Next is Otello’s ability to engage with management and influence decisions at Bemobi, which is positive to the extent Otello continues to act in a shareholder-friendly manner. Otello previously indicated they would look to “strengthen the ownership engagement" with Bemobi - I speculated in other comments above that this could potentially drive larger cash distributions from Bemobi, which is what we ended up seeing this past quarter (I can’t be 100% sure this is due to Otello of course). The last item is tax-related - I could be wrong on this, but it seems to me from the financials that Otello receives Bemobi dividends without paying withholding taxes, which is a benefit. It seems to me that these points have the potential to more than offset the drag that investors pay in additional OpEx at the Otello level.
Hopefully that helps - Let me know if any other questions.
Very well thought through piece. The question it raises is who or whom controls Otello? Because it seems there's a lot of money to made? Whether as a minority retail shareholder you'll ever get to see a piece of the pie is very hard to know.
Hi Leslie - Thanks for reading! Appreciate the comment. I think you raise a fair risk, but I would note that the new board has (so far) indicated a focus on maximizing shareholder value. Otello has historically returned capital to shareholders from divestitures in the form of both dividends and buybacks, and I would expect that to continue going forward. If we see shareholder friendly actions like buybacks being paused/cancelled, that would be a cause for concern. Hope I’m getting at your question - Feel free to let me know if not.
Rohan you did get at my question. I'm guessing from your answer there is no clear person/s that control a significant stake? The board are not always the folk in charge....
Hi Leslie - Sorry, I wasn’t particularly clear in my last response. Otello has historically had two major shareholders, both of whom are British special situation funds - Sand Grove Capital and Kite Lake Capital. To be clear, these funds are distinct and independent from one another. Sand Grove was a ~30%+ owner as of year-end FY23, but has been selling down their stake recently (now owns <15%) - I don’t have great insights as to why they’re selling, but they’ve been involved since 2019. Kite Lake owned ~25%+ as of their last disclosure in September 2022, but I haven’t seen an update on their stake since.
The new board was put in place by a minority shareholder group led by Svend Egil Larsen and Lars Brandeggen, who (based on Norwegian news articles) seem to control ~5% of shares. Both Sand Grove and Kite Lake supported the implementation of the new board.
The reason I think minority shareholders will be able to see value here is given the new board’s stated focus on maximizing SH value, Otello’s track record of shareholder returns through buybacks and dividends, and the fact that the new board was implemented by a minority shareholder group (which you would expect would make them aligned with other minority shareholders). Hopefully that’s more clear and helpful.
Interesting case... Looks like the Norwegian HoldCo is pretty much redundant now (though not sure about the AdColony indemnities) - an extra layer of costs isn't needed, so the activists' case would make sense - but so far the new board's confusing statement ("strengthening our ownership engagement with Bemobi") doesn't inspire confidence.
Hi Dealint - Thanks for reading and for the comment, I appreciate it. As I mentioned in another comment, I agree that it’s unclear at the moment exactly what "strengthening our ownership engagement" means. We should get some additional disclosures over time, but I’m glad to see a new board here pushing for something to be done (if nothing else, to reduce costs at the Otello level and continue to buyback shares, which is highly value accretive).
For what it’s worth though, I don’t know if selling the Bemobi stake immediately would necessarily be the right capital allocation choice. As I tried to highlight above, Bemobi is at an inflection point and should see accelerating Payment growth in the coming years (which is not being reflected in Bemobi’s valuation in Brazil). I’m speculating, but ‘strengthening the ownership engagement’ seems to leave the door open to a variety of value creating options, including working with Bemobi management to drive a rerating, larger distributions from Bemobi, or a sale of the Bemobi stake over time, which one may see as a positive.
Briefly on the AdColony indemnities - The main risk factor seems primarily in relation to a GDPR complaint against Grindr and suppliers (including AdColony) filed in 2020. I believe Grindr itself was only fined EUR6m in relation to this complaint. Given the size of that fine and the time since the initial complaint, with no formal complaint yet issued against AdColony, I don’t think this is a material risk.
Hopefully that helps and definitely feel free to let me know if any other questions/thoughts.
Tremendous writeup. And timely for those of us who've missed out on the Brazil rally so far. I've bookmarked for a second and third read.
Curious what you think of the Nowegians and Brits who replaced Otello's board. Any growth investors among them, or only corporate raider types? Does "strengthening our ownership engagement" mean they're about to push for a large distribution from Bemobi's cash pile, and would doing so affect Bemobi's growth or cap our long run upside in any obvious way?
Thanks Metroid, appreciate it! I don’t have much more insight on the new board other than their bios from LinkedIn and on Otello’s website here: https://www.otellocorp.com/ir/board-of-directors. For whatever it’s worth, one of the podcasts I linked in the write-up was produced by an individual who previously worked with Silje Augustson (one of the new board members) - He speaks of her briefly in the podcast in a favorable light, mentioning her dedication and integrity/shareholder focus.
Overall, they seem less like growth investors - As mentioned, it seems like their primary goal is reducing costs and maximizing shareholder value at the Otello level.
It’s unclear at the moment exactly what "strengthening our ownership engagement" means - I could see it potentially referring to larger cash distributions from Bemobi (Bemobi doesn’t need the excess capital in my opinion - You can see the large cash balance has been a constant since IPO), but could also simply mean working with Bemobi management to better highlight their story in the Brazilian stock market and drive a rerating. We’ll have to wait and see for further disclosures, but I’m glad to see a new board here pushing for something to be done.
Hopefully that helps - Let me know if any other questions.
Interesting idea. Why doesn't management distribute out Bemobi or liquidate the stake and wind up the company?
Hey Zabeel, thanks for reading and appreciate the comment. I mentioned this in another comment, but I don’t know if selling the Bemobi stake immediately would necessarily be the right capital allocation choice given Bemobi’s accelerating Payments growth and low valuation in Brazil. I posted a note earlier (if you haven’t seen it: https://substack.com/@rohansoor/note/c-102934023) that highlights the strength in the most recent quarter - I would expect Bemobi growth to continue strongly in FY25E as utilities, telecoms, and customers from new verticals (education, ISPs, etc.) continue to ramp.
You raise an interesting question - I don’t think Otello needs to exist over time, but a few reasons to keep the entity as is for now (vs. distributing shares) come to mind: First is the wide discount that Otello trades vs. Bemobi. For now, using dividends from Bemobi to buyback Otello shares at a large discount is a prudent form of capital allocation that is currently highly accretive. This is a bit circular - Otello’s discount to Bemobi would presumably completely collapse if Bemobi was immediately distributed to shareholders, but the current strategy allows Otello to increase its Bemobi stake per Otello share over time while (hopefully) still helping to close the discount. Next is Otello’s ability to engage with management and influence decisions at Bemobi, which is positive to the extent Otello continues to act in a shareholder-friendly manner. Otello previously indicated they would look to “strengthen the ownership engagement" with Bemobi - I speculated in other comments above that this could potentially drive larger cash distributions from Bemobi, which is what we ended up seeing this past quarter (I can’t be 100% sure this is due to Otello of course). The last item is tax-related - I could be wrong on this, but it seems to me from the financials that Otello receives Bemobi dividends without paying withholding taxes, which is a benefit. It seems to me that these points have the potential to more than offset the drag that investors pay in additional OpEx at the Otello level.
Hopefully that helps - Let me know if any other questions.
Very well thought through piece. The question it raises is who or whom controls Otello? Because it seems there's a lot of money to made? Whether as a minority retail shareholder you'll ever get to see a piece of the pie is very hard to know.
Hi Leslie - Thanks for reading! Appreciate the comment. I think you raise a fair risk, but I would note that the new board has (so far) indicated a focus on maximizing shareholder value. Otello has historically returned capital to shareholders from divestitures in the form of both dividends and buybacks, and I would expect that to continue going forward. If we see shareholder friendly actions like buybacks being paused/cancelled, that would be a cause for concern. Hope I’m getting at your question - Feel free to let me know if not.
Rohan you did get at my question. I'm guessing from your answer there is no clear person/s that control a significant stake? The board are not always the folk in charge....
Hi Leslie - Sorry, I wasn’t particularly clear in my last response. Otello has historically had two major shareholders, both of whom are British special situation funds - Sand Grove Capital and Kite Lake Capital. To be clear, these funds are distinct and independent from one another. Sand Grove was a ~30%+ owner as of year-end FY23, but has been selling down their stake recently (now owns <15%) - I don’t have great insights as to why they’re selling, but they’ve been involved since 2019. Kite Lake owned ~25%+ as of their last disclosure in September 2022, but I haven’t seen an update on their stake since.
The new board was put in place by a minority shareholder group led by Svend Egil Larsen and Lars Brandeggen, who (based on Norwegian news articles) seem to control ~5% of shares. Both Sand Grove and Kite Lake supported the implementation of the new board.
The reason I think minority shareholders will be able to see value here is given the new board’s stated focus on maximizing SH value, Otello’s track record of shareholder returns through buybacks and dividends, and the fact that the new board was implemented by a minority shareholder group (which you would expect would make them aligned with other minority shareholders). Hopefully that’s more clear and helpful.
Interesting case... Looks like the Norwegian HoldCo is pretty much redundant now (though not sure about the AdColony indemnities) - an extra layer of costs isn't needed, so the activists' case would make sense - but so far the new board's confusing statement ("strengthening our ownership engagement with Bemobi") doesn't inspire confidence.
Hi Dealint - Thanks for reading and for the comment, I appreciate it. As I mentioned in another comment, I agree that it’s unclear at the moment exactly what "strengthening our ownership engagement" means. We should get some additional disclosures over time, but I’m glad to see a new board here pushing for something to be done (if nothing else, to reduce costs at the Otello level and continue to buyback shares, which is highly value accretive).
For what it’s worth though, I don’t know if selling the Bemobi stake immediately would necessarily be the right capital allocation choice. As I tried to highlight above, Bemobi is at an inflection point and should see accelerating Payment growth in the coming years (which is not being reflected in Bemobi’s valuation in Brazil). I’m speculating, but ‘strengthening the ownership engagement’ seems to leave the door open to a variety of value creating options, including working with Bemobi management to drive a rerating, larger distributions from Bemobi, or a sale of the Bemobi stake over time, which one may see as a positive.
Briefly on the AdColony indemnities - The main risk factor seems primarily in relation to a GDPR complaint against Grindr and suppliers (including AdColony) filed in 2020. I believe Grindr itself was only fined EUR6m in relation to this complaint. Given the size of that fine and the time since the initial complaint, with no formal complaint yet issued against AdColony, I don’t think this is a material risk.
Hopefully that helps and definitely feel free to let me know if any other questions/thoughts.
Great read
Thank you!