NII Holdings: Final Boarding Call For This Liquidation Play

NII Holdings (NASDAQ: NIHD) has been a frequently discussed stock on a number of stock blogs over the course of 2019.

Earlier this year the South-American network operator announced it planned to liquidate after selling off its last remaining operating subsidiary in Brazil. However, it was unclear when (if at all) the transaction would close, and what the exact net sale proceeds would eventually be. The stock made for quite a risky bet, with a significant downside if the sale would have fallen through or would have been delayed considerably.

This Wednesday the NII Holdings-investment case was significantly de-risked when the company said its sale of Nextel Brazil had finally closed, a few months behind schedule. While the expected return of this investment has also dropped with the news of the deal closing and the stock rising significantly, I believe there’s still enough upside potential left to take a look at this defensive liquidation play.

There isn’t much time left though: with NII Holdings preparing to dissolve the company and distribute remaining cash to shareholders, it announced trading in its shares will likely be suspended and subsequently delisted from the 2nd of January onwards.

After the sale of Nextel Brazil NII Holdings will hold approximately 191 million dollar in cash, as well as 268 million dollar in three different escrow accounts. Considering the size of the amount in escrow, it’s clear these accounts are quite important in this liquidation scenario. Let’s quickly go over them:

  • 135 million dollar to pay off NII Holdings convertible debt holders. Unless a settlement is reached about premature payment, recovery should be zero.
  • 30 million dollar for indemnification with regards to (tax) claims surrounding the sale of Nextel Brazil. Recovery is uncertain.
  • 103 million dollar for indemnification with regards to (tax) claims surrounding a previous sale of its Mexican operations. NII Holdings estimated recovery at 75 million dollar earlier this year.

With regards to distributing cash to its shareholders, NII Holdings made the following statement:

Based on current information (including actual net sale proceeds), assumptions and estimates, the Company expects the total amount of cash available to be distributed to stockholders in the future will be between $227 million ($2.17 per share) and $280 million ($2.68 per share). 

This range of distributable values is primarily driven by the ultimate recovery of amounts currently held in escrow accounts.

NII Holdings did not provide any clarity with regard to the timing of future distributions. However, the company previously said they were planning to make an initial distribution of $1.00 – $1.50 per share (104-156 million dollar) in the months following the sale of Nextel closing. Even when considering liquidation costs, I can’t think of a good reason why that initial distribution wouldn’t be on the high end of that range, considering the amount of cash on hand.

The timing of subsequent distributions will be dependent on when amounts in escrow will be released. NII Holdings is battling in US courts trying to get up to 65 million dollar released as soon as possible from the Mexican escrow: a positive ruling would significantly speed up the liquidation process (and the expected IRR of this investment). The Brazilian escrow will expire 18 months from now.

Investment case:
With NIHD shares currently trading at $2.19, in the worst-case estimate of NII Holdings itself, you basically get slightly less than your money back. Best case you earn a 23.5 percent return.

As written previously, NII Holdings will likely no longer be tradable after the 2nd of January making it impossible to exit your investment. However, most of the cash (about 50-70%) should be recouped within six months, when the NII Holdings should be able to pay its initial distribution. Remaining distributions will likely be made within the next three years, and decrease in size as time goes by.

I personally like these kinds of investments which have very little correlation with general market returns. When assuming a first distribution in the higher range, and then taking the average of the company’s own estimates about what it will distribute in total over the course of the next three years, I get a decent IRR of about 11%, with a bit more upside potential in case of a speedy escrow recovery.