Tuesday, January 22, 2008

Feds fund rate cut by 3/4% to 3.5% and UT goes down 9% to an all-time closing low

The market makes a lot of sense, right?

One of the major weaknesses of UT as a company has been management. For some reason or another, it has been "behind" the curve regarding managing the PAS downturn, anticipating the rise of 3G, iptv, and cutting costs or selling assets (divisions and/or holdings). But, it may be catching a break at an opportune time here in dealing with the convertible bond. Consider:

-Over the last few months, the feds funds rate has gone down from 5.25% down to 3.5%. In addition, further rate cuts are expected. Despite the negative percerptions on what rate the company can get, the sharp drop in the fed funds rate, slowing economy, and expectations of further cuts will allow the company to negotiate a lower short or long term deal.

-Efficient use of capital. The convertible coming due has forced the company to transfer funds from China that were earning 2%. The company paid $22 million in additional interest in 2007 just for being late in filing on top of the regular interest payments.

-Appreciation of investments. Gemdale and Infinera were less than $5m at the start of 2007 and was close to $90-100m at the end of 2007. The fact that the CB is coming due has forced the company to sell at relative highs.

-Falling dollar/appreciating currencies outside US. Since the debt is in dollars, the company has been able to take advantage of the currency appreciation the last few years and will continue to do so if they get additional bridge loans as revenues from outside the US will pay for any new loans denominated in dollars.

-Slowing worldwide outlook will help PAS extend its life. Pas revenues are still very critical to UT and delays in spending/implenting 3G rollouts can only extend the life of PAS.

-Cost cutting/2008 cash flow outlook. In a few weeks, UT will discuss q4 2007 results and present 2008 projections. The street will watch for signficant improvements in cash flows for 2008. The head count reduction completed in q4 will start having an impact in q1 2008. The lack of investigation costs related to the options/China contracts/interest payments should help signficantly. Blackmore mentioned signing one Asian OEM and in talks with others. He talked about cost savings of $50m or more from inventory management. If there was any time that management needs to present a good outlook, this is it.

In summary, Barton has been presented with a much better environment than 6 months ago. Some have been by design as UT hired Blackmore, implemented cost cuts, and took a lot of the write-offs/spending in 2007. Others have been by chance (luck) as investments went up, the economy is slowing down and rates being cut. They have sufficient funds to pay most if not all of the convertible bond and could get a bridge loan or even a longer term loan for much better rates. The debtors know this is a company that will pay their debt back (and more!). Barton has collected some serious compensation for terrible work in my opinion. He is now presented with an almost slam dunk situation to deal with the CB to the shareholders best interest (as if he had to say that in public-unbelievable). In any case, todays drop to $2.57 is ridiculous indeed. I picked up a token 3k shares for $2.62 in defiance of this madness :-) I expect a major earnings run coming up....hopefully.


Anonymous said...

you`re still wondering why ut is at 2.57? don`t you read the news? for example, that microsoft along with local partners and not utsi just inked the korean iptv deal (yesterday)....?! you`re still hoping...? me too, that these fraudulent self-enriching blablah-crooks lu, barton, toy...just to name some highlights - finally end up in jail!

Anonymous said...

Hi Tim, great initiative.
Unfortunately I can't write it up, since I advised a freind to buy some UTSi as a speculative play recently, so it would be a conflict of interests. Although my team usually writes up hedge fund news, we occasionally deal with s/h activism initiated by institutions (i recently worte up the TUI-Wyser-Pratte spat). This is one of those rare "retail" (i.e non-institutional) s/h initiatives, and could be an interesting piece, esp as a lot of you seem to be long-term s/hs.
If you can send me some contact details I will see if any of my colleagues want to follow this up (martin.desapinto@reuters.com).