Upcoming Spin-Off Should Unleash IDT Corp.'s Value

IDT Corporation is a consumer services-focused company with operations primarily in the telecommunications and energy industries. The following is a chart showing IDT’s lines of business:

Through IDT Telecom, the company provides various telecommunications services, including prepaid and rechargeable calling cards, a range of VoIP (Voice over Internet Protocol) communications services and wholesale carrier services. Through this segment, it as well provides consumers local and long distance phone services.

Genie Energy consists of IDT Energy and Genie Oil & Gas. Through IDT Energy, the company resells natural gas and electricity to residential and small business consumers in eight utility markets in New York state. At the end of 2010, the company began adding clients in two utility territories in New Jersey and Pennsylvania. Through Genie Oil & Gas, the company has interests in oil shale projects in Colorado and Israel.

The early 2000s

In the early 2000s, IDT Corporation sold off Net2Phone to AT&T and, as a result, had over $1 billion in cash. The former CEO wasted it by investing it in many unproven ventures during not in effect placing much emphasis on running the business in a profitable fashion. Before long, the company’s cash went from billions to millions, and bloated operating costs helped burn it even faster. Because the company was on its way to bankruptcy, the stock price got crushed. The company as well received a delisting notice from the New York Stock Exchange as its market capitalization fell below the required level.

Howard Jonas, the founder, seeing his company disappearing, came back as CEO and orchestrated one of the most remarkable turnarounds ever. He cut the workforce by 80 percent from 5,000 to 1,000, gave up on unprofitable ventures, sold off real estate, and spun off certain businesses. Shortly the business started turning a profit and its cash position started to grow again. The stock began to recover.

IDT Telecom generates about $51 million in EBITDA, and based on the valuation methodology that the management provided in its investor presentation, this segment is worth between $180 and $275 million or $7.83 and $11.96 per share. This assumes multiples of 3.5 and 5.4 times EBITDA, which are low, however I believe this is justified considering that sometime hereafter products just as prepaid calling cards, which represent a significant source of revenue, might not exist anymore. In the nearly future, they are not going anywhere. Because the value is between $7.83 and $11.96 per share, I will assign it a value of $10 per share.

IDT Energy generates about $36 million in EBITDA, and based on the valuation methodology that the management provided in the investor presentation, this segment is worth between $145 and $180 million or $6.30 and $7.82. This assumes multiples of 4 and 5, which some might argue are too low because this business is growing; the company is entering new markets just as Pennsylvania and New Jersey. Nevertheless, to remain conservative, we will go with these multiples and estimate the value of this segment at $7 per share.

Fabrix is an Israeli company in which IDT is a majority stake holder. Fabrix licenses a video software platform optimized for cost-effective video storage, high throughput streaming and intelligent content distribution. That is, it provides software that allows you to rewind your TV without having a TiVo box or some other digital recorder because the channels are stored on back-end servers. This software is used by cable, telecommunications, Internet service providers and web-based video portals interested in offering personalized television applications and remote DVR storage capabilities.

In the past, we were forced to watch television programs at particular times, now now we are demanding more. We want to consume any kind of content, at any time, and on any device. Accordingly, service providers must offer it to us or we will switch to someone who will. To achieve this, these companies need lots of storage and this is where Fabrix comes in as it provides them with a set of scalable video storage and delivery solutions.

At this point, it is hard to estimate how much Fabrix is worth because it does not contribute a significant amount of revenue to IDT. Now, it is not costing the parent company any more because it is nevertheless operating on a break-even basis. That being said, we can on the whole put a rough estimate of value based on what is already known. While the Investor Day Presentation, Jonas hinted that IBM and Dell expressed interest in the possible investment or acquisition of Fabrix. There are rumors that IBM was willing to pay as much as $100 million for Fabrix. If the rumors are true, Fabrix would be worth $70 million or $3 per share because IDT owns 70 percent of it.

However, the rough estimate of value is only for today and it does not account for what Fabrix could be worth henceforth. The management states that we are just at the outset of the multi-billion dollar developing market and Fabrix has the leading innovation. Currently, Fabrix is targeting companies that sell to clients in North America and Western Europe because these regions have lots of people who pay for content. The future market will be Asia.

As I mentioned previously, Fabrix just started breaking even -- now this is about to change. In August 2010, a major cable operator, Cablevision, licensed Fabrix software to empower its cloud-based DVR offering. In January 2011, Cablevision started offering the network-based DVR service for which Fabrix is the primary vendor. Currently, this service is available only to residential clients located in the Bronx. This is clearly not reflected in IDT’s financial statements but.

The number of people using this site is exploding as people are shifting from desktop to mobile computing. According to management, there are currently roughly 40 million unparalleled visitors per month as shown in the following graph:

The value of $2 per share is only as of today

But the value of $2 per share is only as of today and does not account for what it could be worth hereafter. The management believes it has substantial potential. Here is why. Zedge used to cost IDT millions of dollar per year now recently it has broken even, similar to Fabrix. As I mentioned previously, Zedge generates revenue by advertising to 40 million users who download wallpapers and other cool things.

IDT Corporation owns VoIP patents. The company spent millions of dollars defending them and recently settled an infringement lawsuit with Skype. Because the use of VoIP is widespread, there might be many other infringement cases, and the company has decided to actively go afterwards them. This means that it might be able to generate additional cash from VoIP patents. To unlock this value, IDT is in the process of spinning off this segment as a separate company. Because I have thoroughly no idea what this could be worth I am assigning its intellectual property a value of $0.

Consequently, effective January 1, 2007, it received a 10-year lease for technology, development and demonstration in western Colorado. This lease covers an area of 160 acres. Once the company demonstrates the economic and environmental viability of its research, it will be able to convert the initial lease to a commercial lease with 5,120 acres that contains in broad outline 10 billion barrels of oil equivalent.

In July 2008, the Israeli Ministry of National Infrastructure awarded IDT’s Israel Energy Initiatives an exclusive Shale Oil Exploration & Production License. This is a three-year license that can be extended to a total of seven years, and it covers roughly 238 square kilometers in the South of the Shfela region in Israel. The area holds in broad outline 40 billion barrels of oil equivalent. Afterwards the company demonstrates commercially viable research, it will be able to apply for a 30-year commercial lease from the Israeli government.

The in the meantime

In the in the meantime, to demonstrate the commercial viability of its research on both of the oil ventures, IDT assembled a team of experts who are some of the best minds in the oil shale field to work on a non-traditional way of extracting oil from shale. The traditional way of extracting oil from shale requires digging up the rock and heating it to high temperatures. This takes a lot of energy and creates a tremendous amount of mess.

I believe that the market is ignoring these valuable segments because it is too difficult to understand IDT. From the market’s point of view, IDT sells prepaid calling cards, is involved in reselling natural gas and electricity, and helps users download ringtones. What's at once, a pet grooming business? It is simply too hard to understand what is going on

However, this is about to change as the company is preparing to execute a spin-off where the company’s telecom business will be separated from its energy business. The spin-off is expected to be completed by the end of IDT’s fiscal year, which ends July 31, 2011.

I believe that the spin-off will be a catalyst that will benefit shareholders greatly. Currently, if you want to invest in IDT’s Telecom business, you as well have to invest in the oil shale project. However what if you simply do not want to be involved in the oil shale business?

The other hand

On the other hand, if you want to invest in the oil shale venture, you as well have to invest in IDT’s boring telecom business. By separating IDT Telecom from Genie Energy, the company will satisfy both groups of investors. Those who are more adventurous will be happy to have a more pure play on oil shale, and those who are more conservative will be happy to invest in its telecom business.

After the spin-off, you will own both IDT Corporation and Genie Energy as separate stocks. As a sum, they will likely trade at higher prices than what IDT is currently trading for as one company. IDT Telecom will be spun off with some cash, and it will pay a dividend of $0.22 per quarter or $0.88 per year. Considering that this business generates lots of EBITDA, maintaining this dividend should not be a problem.