The fund’s top 5 holdings as of December 31 were Fiat, Fortress Investment Group, Videocon, IDW Media, and Gaia. The thesis on Fortress remains the same: it is a quality business with 45% insider ownership trading for a modest premium to cash and investments giving very little credit to future incentive fees. While the share price did nothing in 2016, we did collect almost 10% in dividends, so we are getting paid to wait. The other top five holdings with a little more detail are as follows:

  • IDW Media (IDWM): The company continues to execute on its plan to use the cash flow from its stable advertising business to fund its entertainment business, which consists of comics, books, games, and television. Long-term economics, and the share price, will be determined by the number of TV shows the company gets on the air. They currently have two shows up with a path to five or more in 2018, and management has a strong track record of identifying content and developing properties. Results will be lumpy and progress episodic, but the long-term prospects appear healthy. An independent publicly traded vertically integrated entertainment company is a rarity. They tend to be gobbled up. If IDW Media has five shows on the air in 2018, there could be $30M+ in EBITDA. Apply any sort of take out multiple for a strategic acquisition of a unique asset and our patience will be well rewarded.
  • Gaia (GAIA): The investment thesis was outlined in great detail in the last letter. Gaia’s CEO owns 38% of the company and did not sell a single share during a tender offer over the summer. The company has a fully funded business plan to grow subscribers to the video streaming business over the next five years. I had the opportunity to sit with Gaia’s Chief Marketing Officer this fall. While they do not disclose customer acquisition costs or churn rates at the level of granularity I would like for modeling purposes, the meeting shed light on the level of targeting they do on platforms like Facebook, as well as the associated tracking methodologies. The landscape may ultimately change, raising customer acquisition costs and increasing churn to make Gaia a less attractive business, but the CEO – who owns multiple of what we own – has sold four previous businesses, so there is reason to believe he would sell again if the business deteriorates.
  • Videocon DTH (VDTH): This is an Indian satellite TV provider that we have been invested in since 2015. While the company’s operating performance has been outstanding, the share price has gone nowhere (well actually down modestly). This is a fundamentally healthy business with revenue growing 20% y/y, rising prices, realizing operating leverage, and lowering churn. During the fourth quarter, a deal was announced to merge with DishTV India, another publicly traded Indian satellite TV provider. We bought more shares when the deal was announced, as the deal provides a number of benefits, including reducing the threat of a price war. Going from four to three major providers does not eliminate the threat of a price war, but it is a step closer to stability. VDTH has been the fastest growing provider because they offer the most channels in each price band – their growth would undoubtedly slow if a competitor decides to change the pricing paradigm. There is now one less potential disrupter. Fortunately for us, the structure of the deal allows us to participate in the substantial cost savings of the combined entity as we will receive DishTV India shares. Expectations are that 5% or more of costs can be taken out of the business from savings on content and increased scale, and there are additional savings if there is an eventual shift to the same satellites. There will be reduced leverage as well. In effect, we gave up some of our growth to the slower-growing DishTV India holders in exchange for their higher multiple shares and the ability to access the post-deal synergies that benefit both parties. Given that so many benefits should occur post-transaction, I am happy to hold the shares of the new entity. It should be noted that while VDTH is covered by two sell side analysts, to this date, neither has felt compelled to publish research covering the merger deal, which was announced in November. While not completely invisible, not a lot of U.S. investors are focused on the opportunity.

This post has been excerpted from the Greenhaven Road Capital Q4 2016 Letter.

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