America's Most Hated CEO Just Got Sentenced to Prison. Here's What It Will Be Like For Him

His cockiness was gone. Minutes before he was sentenced to prison, the man known as the “Pharma Bro” and the “most-hated CEO in America” broke down in tears, to the point that the judge asked a clerk to hand him a box of tissues.

Barring an appellate miracle, Martin Shkreli, just a few days shy of his 35th birthday, will be in his 40s before he walks the street a free man again. Judge Kiyo Matsumoto  sentenced him Friday to seven years for his stock fraud conspiracy convictions.

It wasn’t quite as harsh a sentence as prosecutors wanted; they’d asked for 15 years, but it was much more severe than the 18 months Shkreli’s lawyers asked for. It’s certainly much more than the “time served” at “Club Fed” Shkreli had predicted he’d get, and where he thought he’d be playing tennis and XBox.

There’s little sympathy for Shkreli on the outside–except for a small but passionate group of supporters, many of whom followed him on social media, and think he got royally screwed over.

Even during his trial, Shkreli seemed to try to show he wasn’t taking seriously: dropping in on reporters (he called the prosecutors “junior varsity”), using social media during the evenings, refusing to wear a tie, and simply reading a book during closing arguments.

Still, it’s not the stock fraud and conspiracy that he’s known for; it’s the notoriety he received as a drug company CEO, when he hiked the cost of an antiviral drug by 5,455 percent (from $13.50 to $750 a tablet)–and seemed to revel in the bad publicity.

What will life be like now for Shkreli, in prison? It’s impossible to predict, but the Internet is awash with accounts of what life is like behind bars for white collar federal prisoners like Shkreli.

In a word, it would seem, Shkreli’s time will likely be “difficult,” for three main reasons:

  1. Because the cushy Club Fed-style prisons he seemed to anticipate doesn’t really exist anymore (if they ever really did).
  2. Because Shkreli is already well-known, and likely still fairly wealthy, even after he’ll have to forfeit more than $7 million and pay a $75,000 fine.
  3. Because if there’s one thing Shkreli has proven, it’s that he has a really difficult time controlling his ego and his mouth. That causes people to feel passionately about him on the outside, and it’s hard to imagine him changing quickly behind bars.

There’s one consolation for Shkreli: The judge sentenced him to less than 10 years, so he’s far more likely to do his time in a minimum security federal prison camp, than a tougher, higher security facility.

Depending on where he winds up, the prison camp he’s at might not have razor wire or even many locked doors. The threat of more time in a tougher facility is enough to keep most people from walking away.

But it’s not fun, and as several well-known people who spent time in federal custody have explained, the deck is stacked against people with a public profile.

“The more ‘high profile’ you are–unlike in the non-prison world–the fewer perks you may receive,” according to a Business Insider article a few years ago profiling former NYC police commissioner Bernie Kerik, who spent four years in federal prison for tax fraud, among other charges.  

“Once you arrive at prison–I was shocked by the psychological punishment,” said Kerick who was in the kind of federal prison camp where Shkreli is likely to wind up. You are constantly berated, degraded, demoralized,” he says. “You’re herded like cattle.”

Another former federal white collar prisoner, Mike Kimelman, who was convicted of insider trading and spent 15 months in prison, had a harsh description for it as well.

“I learned what an abject disgrace our prison system is (really the entire criminal-justice system),” he told Turney Duff at CNBC. “While I get that it’s supposed to be punitive, I find it hard to believe that the American public would allow it to exist in its present state if they knew what it was like.”

And, Matthew Kluger, an attorney who got 12 years for insider trading, and gave an interview while still in prison.

“The couple things that are the worst about being here, have nothing to do with the facilities or things that you can show visually on TV. … Here, you look around, and it looks pretty nice,” he said. “[I]f this were filled with 1100 people that you want to hang out with, this would be a fine place to be. Unfortunately it’s not.”

The biggest challenge, he added, “is other people. It’s being with this diverse crowd of people who are generally angry, somewhat antisocial, not the kinds of people that you want to spend your time with in the outside world. So that makes it hard.”

(Kluger’s interview by the way, is really long and wide-ranging on life in a federal prison; if you’re really interested in this it’s worth checking out. He’s still inside, too, until 2022.)

There is certainly life after 40, and Shkreli’s last act has yet to be written. But leave no doubt: this is a harsh sentence and he faces years of difficult challenges as a result. 

Toshiba expects to complete chip unit sale by June at latest: executive

YOKKAICHI, Japan (Reuters) – Toshiba Corp (6502.T) expects the sale of its $18 billion memory chip business to be completed by June at the latest, if not by an agreed deadline of the end of March, as it awaits antitrust regulatory approval from China.

FILE PHOTO: A logo of Toshiba Corp is seen on a printed circuit board in this photo illustration taken in Tokyo July 31, 2012. REUTERS/Yuriko Nakao/File Photo

“We’ve been making various efforts to close the deal in March,” Yasuo Naruke, the head of Toshiba’s chip unit, told reporters on Friday.

Even if the deal did not close by then, it would close “at some point in April, May or June,” Naruke said during his visit to a new chip R&D center in central Japan.

Toshiba agreed last year to sell the semiconductor business – the world’s second-biggest producer of NAND flash memory chips – to a consortium led by U.S. private equity firm Bain Capital to plug a huge financial hole left by the bankruptcy of its U.S. nuclear unit.

It is widely viewed as unlikely to gain the necessary regulatory clearance by the end of the financial year in March, however, as Chinese reviews usually take at least six months.

Toshiba is in less of a rush to finalize the deal since it received injections of capital late last year from overseas investors. If it does not complete the deal by March, it has the option of walking away, sources have said.

Some activist shareholders have opposed the sale, arguing that the fresh capital made it unnecessary.

The flash memory chip business has been the source of most of Toshiba’s earnings as the company struggles to grow other core businesses such as social infrastructure.

Reporting by Makiko Yamazaki; Editing by Stephen Coates

Qualcomm: Thank You, CFIUS

Rethink Technology business briefs for March 6, 2018.

The CFIUS letter makes clear that security concerns are not “theater”

Broadcom CEO Hock Tan, source: Broadcom.

Broadcom (AVGO) has characterized the delay in the Qualcomm (QCOM) shareholder meeting as

…a blatant, desperate act by Qualcomm to entrench its incumbent board of directors and prevent its own stockholders from voting for Broadcom’s independent director nominees.

Broadcom also has criticized the secrecy surrounding Qualcomm’s request for a Committee on Foreign Investment in the U.S. (CFIUS) review:

Broadcom reiterates that Qualcomm failed to disclose to its own stockholders and to Broadcom that it secretly filed a voluntary unilateral request for CFIUS review on January 29, 2018. Broadcom’s only correspondence with CFIUS was in response to CFIUS inquiries about Broadcom’s nomination of directors to the Qualcomm board of directors, and such requests did not reveal that Qualcomm filed to initiate the CFIUS review on January 29, 2018.

Although Broadcom clearly wants to portray Qualcomm’s management as going behind the backs of its shareholders, I doubt that the secrecy can be considered a failing.

The Wall Street Journal has published a letter by the Treasury Department’s Deputy Assistant Secretary Aimen N. Mir explaining the investigation that was sent to both parties on March 5. Mir divulges some information about Qualcomm that, while not classified, is probably not generally known:

U.S. national security also benefits from Qualcomm’s capabilities as a supplier of products. For example, Department of Defense national security programs rely on continued access to Qualcomm products. Qualcomm holds a facility security clearance and performs on a range of contracts for the United States government customers with national security responsibilities. Qualcomm currently holds active sole source classified prime contracts with DOD.

In my past life in the defense industry, I probably worked for many of those same government customers, and I can attest to their sensitivity regarding security matters. They would expect Qualcomm to proceed with the utmost discretion.

It was entirely appropriate for Qualcomm to alert CFIUS to the national security implications of the Broadcom takeover. The only thing that’s mildly surprising is that Qualcomm even needed to do this. But it’s probably symptomatic of the “compartmentalization” of so many of these types of classified programs.

Personnel in these programs often can’t even acknowledge their existence. Probably, Qualcomm did first alert its customers, who then “suggested” that Qualcomm inform CFIUS since the customers themselves would be precluded from doing so.

The letter’s unintended irony

The Mir letter also describes a broad range of concerns about the impact of weakening Qualcomm’s competitiveness, especially in the emergent technology of 5G:

Reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security. This is in large part because a weakening of Qualcomm’s position would leave an opening for China to expand its influence on the 5G standard-setting process.

Also, a concern is what Broadcom will change post acquisition:

CFIUS, during the investigation period, will continue to assess the likelihood that acquisition of Qualcomm by Broadcom could result in a weakening of Qualcomm’s position in maintaining its long-term technological competitiveness. Specifically, Broadcom’s statements indicate that it is looking to take a “private equity” style direction if it acquires Qualcomm, which means reducing long-term investment, such as R&D, and focusing on short-term profitability.

Almost certainly, this would be the case, especially considering the $106 billion in debt financing the Broadcom intends to use. The letter is refreshingly complimentary of Qualcomm, especially in light of the vilification of Qualcomm as an abusive monopolist at the hands of the Federal Trade Commission.

After applauding Qualcomm’s technological leadership and R&D investments, the letter takes a somewhat different view of Qualcomm’s licensing business than the FTC:

Qualcomm’s current business model is based upon licensing of patented Qualcomm technologies; Qualcomm believes that Broadcom will change that licensing methodology. Broadcom’s CEO Hock Tan recently criticized Qualcomm’s licensing structure, saying he would reset the business model, which he called “broken.” However, Mr. Tan did not elaborate on how he would change the existing model, which currently relies on the licensing business to fund the company’s large R&D expenditures. Changes to Qualcomm’s business model would likely negatively impact the core R&D expenditures of national security concern.

The letter rightly characterizes Qualcomm as a national technological resource, yet it is the very actions of the government in the form of the FTC suit that have contributed to the weakening of Qualcomm and its vulnerability to takeover.

Why I voted the White Card

The impending proxy fight involves voting between competing slates of directors. Shareholders have been mailed proxy ballots, a “white card” for Qualcomm incumbents and a “blue card” for the Broadcom candidates. I voted (online, because it’s easier than mailing in the ballot) for the Qualcomm incumbents.

I’ve often been critical of Qualcomm’s management for its cluelessness regarding its regulatory issues. I firmly believe that reform of Qualcomm’s business practices is necessary. However, I’ve never believed that Qualcomm should or would be required to dismantle its fundamental licensing practices.

Apple (AAPL) has complained about being “taxed” on every iPhone its contract manufacturers make as if the $10 or $15 of added cost is an onerous financial burden. Apple claims, as the FTC has claimed, that Qualcomm has no right to charge royalties at the handset level.

Qualcomm has every right to do so. Qualcomm reached an agreement with the contract manufacturers to license not one or two patents but a large portfolio of patents that might or might not be applicable to a given handset (and not just Apple’s). For simplicity and convenience, the fees were to be paid on a handset basis.

It’s a perfectly enforceable and reasonable licensing contract, and Apple and the FTC will be proved wrong in challenging it. Licensing of patent bundles is a common practice that neither Apple nor the FTC is empowered to overturn. In every successful anti-competition action that has been taken so far anywhere in the world against Qualcomm, not once has Qualcomm been required to abandon the practice.

Convinced as I am that Qualcomm will ultimately prevail against Apple and the FTC, I was surprised to learn in the days before the planned (and now delayed) shareholder meeting that the proxy vote was going to be close. And some are now convinced that Qualcomm would have lost the vote.

Qualcomm’s institutional investors, which own 79% of outstanding shares, seem to have lost their nerve to stay the course. It’s hard to blame them. Given that Qualcomm’s growth opportunities are from certain, while anti-competition actions, such as the recent EU fine of $1.2 billion, seem very certain, the $82/share Broadcom offer must seem like a great way cash out with a net gain.

I continue to believe that the best interests of Qualcomm’s shareholders are served by Qualcomm moving forward with the NXP (NXPI) acquisition. On February 20, Qualcomm upped its bid by 16% for NXP to $127.50/share cash, while lowering the minimum tender threshold to 70% from 80%.

More importantly, Qualcomm reached an agreement to buy the shares of major institutional holders of NXP who together own 28% of the company. Among them was Elliott Advisors, who had vocally opposed the deal until now. Having mollified Elliott probably paves the way for broad-based acceptance of the tender offer and conclusion of the deal.

My investment case for Qualcomm has always been predicated on the NXP acquisition. In announcing the amended offer, Qualcomm pointed out that $1.50 of its non-GAAP EPS target for 2019 of $6.75-7.50 would come from NXP. NXP has been the one sure thing in the Qualcomm growth strategy.

With the acquisition of NXP, its 5G leadership, its brilliant ARM processor design, its innovation in mobile communications, Qualcomm deserves to remain an independent, and most importantly, American, enterprise.

Disclosure: I am/we are long QCOM, AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Why the Government Is After a Unique Wu-Tang Clan Album (And How It Can Be Yours)

The short history of the Wu-Tang Clan’s 2014 album “Once Upon a Time in Shaolin has been weird and fraught. Now it’s getting even weirder.

Only one copy of the double album exists, which was sold at auction in 2015 for $2 million to one Martin Shkreli.

If that name sounds familiar, it’s because Shkreli has been in the news in recent months and is currently in jail awaiting sentencing after being convicted of securities fraud (it turns out he’s doing quite well there). Shkreli is also known as America’s most hated CEO or the “pharma bro” who jacked up the price of a drug used to treat malaria, cancer and AIDS by over 5,000 percent.

Yea, this is the same guy you’ve heard about.

Now the latest is that a federal judge has ordered that Shkreli forfeit over $7 million worth of his possessions as part of his sentence, including the world’s only copy of “Once Upon a Time in Shaolin.”

The appeals process may prevent the actual transfer of the album to the feds for awhile, but if the current rulings against Shkreli are affirmed, he’ll have to hand it over and one federal judge will be able to throw some of the most sought after listening parties ever.

Just kidding, no ethical judge would ever do such a thing. 

What’s actually most likely to happen is that the album will instead spend a period of time in a vault somewhere until it can again be auctioned off in what will certainly be one of the hippest government auctions ever. Because, you know, cash rules everything around us; dollar dollar bills, y’all.

But until that fateful day when a different rich person bids a crazy amount of money to possess the secrets of Shaolin, it will briefly be the property of the people.

Not that we can expect to demand access to the one-of-a-kind album by rolling up to a courthouse and flashing a U.S. passport, but for a period of time it will technically be a ward of the state.

If we want to keep it that way, perhaps we the people ought to start a crowdfunding campaign to raise some cash for the winning bid to take possession and then release the album into the public domain.

Of course, this might not be all that exciting if you’re not into Wu-Tang. If you consider yourself more high brow, the pharma bro’s collection may still be of interest. Shkreli’s tastes turned out to be diverse; he’s also being forced to give up a rare Pablo Picasso painting.

Washington State Enacts Net Neutrality Law, in Clash with FCC

Washington state Governor Jay Inslee Monday signed the nation’s first state law intended to protect net neutrality, setting up a potential legal battle with the Federal Communications Commission.

The law bans broadband providers offering service in the state from blocking or throttling legal content, or from offering fast-lane access to companies willing to pay extra. The law doesn’t stop providers from imposing data limits, and doesn’t address the practice of allowing certain content to bypass data limits, known as “zero rating.”

The FCC attempted to pre-empt any such state laws when it voted to repeal its own net neutrality rules in December, setting up the potential legal clash. Legal experts are unsure how such a dispute will play out.

The Washington bill enjoyed bipartisan support in the state legislature, with dozens of Republican lawmakers voting in favor of the new rules last month. The bill passed with a vote of 93 to 5 in the state House, and 35 to 14 in the Senate.

“This is not a partisan issue,” Norma Smith, a Republican who co-sponsored the bill in the House, said in a statement last month. “This is about preserving a fair and free internet so all Washingtonians can participate equally in the 21st century economy.”

The governors of Montana, New York, New Jersey, Hawaii, and Vermont have signed executive orders banning state agencies from doing business with broadband providers that don’t promise to uphold the principles of net neutrality. But Washington is the first state to pass rules that ban network discrimination.

At least 25 other states are considering net neutrality bills, including California, Illinois, and New York. Both houses of Oregon’s legislature have passed a bill that, like the executive orders, bans state agencies from doing business with broadband providers that don’t follow net neutrality. Governor Kate Brown plans to sign it within 30 days.

The FCC did not immediately respond to a request for comment. The agency’s order repealing its net neutrality rules cites a long history of preempting state law. For example, in 2007, a federal court ruled that the FCC had the authority to block the state of Minnesota from regulating internet phone services like Vonage the same way it regulates traditional landline phone services. But net neutrality advocates point to a 2016 federal court ruling that the Obama-era FCC didn’t have the authority to pre-empt certain state laws concerning municipal broadband.

Marc Martin, a former FCC staffer who is chair of law firm Perkins Coie’s communications practice, says the law on pre-emption is unsettled. But he thinks the executive orders banning state agencies from doing business with non-neutral broadband providers are more likely to withstand legal challenges. “I wonder if anyone will even fight it,” Martin says.

Meanwhile, net neutrality advocates are pushing a Senate proposal that would force the FCC to keep its net neutrality protections. The proposal has garnered the support of 50 senators, including every Senate Democrat plus Senator Susan Collins (R-Maine). But even if supporters of the proposal can get one more Republican senator to vote in favor of the proposal, it would still need to pass the House and be signed by President Donald Trump.

Longtime opponent of net neutrality rules Representative Marsha Blackburn (R-Tennessee) has proposed a bill that would ban broadband providers from blocking lawful content, but would allow throttling and fast lanes while banning states from passing their own net neutrality rules and curbing the FCC’s authority over broadband.

Net Neutrality

  • The end of net neutrality will likely make broadband packages look more like the mobile internet, where favored content providers are exempt from data caps.
  • This app can help consumers, watchdogs, and regulators check for potential violations of net neutrality principles.
  • Read the WIRED Guide to Net Neutrality.

Chinese Startups See Latin America as a Land of Opportunity

Two years ago, Tang Xin had never set foot in Mexico and didn’t know a word of Spanish. While his grasp of the language hasn’t improved much since then, he has built one of the country’s hottest apps.

Noticias Aguila, which translates as News Eagle, now has 20 million users and became the No. 1 news app in Google Play’s Mexico store late last year, according to App Annie. That has come as Tang and his development team remain based in Shenzhen, the Chinese technology hub just across the border from Hong Kong.

Tang, who worked for Tencent Holdings (tctzf) before striking out on his own, is among an emerging group of Chinese developers and investors betting the next technology gold rush will come from Latin America and its 600 million-plus people. Fueled by deep-pocketed mainland venture capitalists and success at home, the 40-year-old and his peers are exporting a formula honed in China of pursuing rapid expansion over profitability.

Chinese venture capital investment in Latin America jumped to $1 billion since the start of 2017, compared with about $30 million in 2015, according to data collected by Preqin.

“China used to copy from overseas, but now we see more opportunities by helping replicate business models that’ve taken off and exporting them,” said Tang, who now spends a quarter of his time in Mexico. “Competition is so fierce in China that smaller companies feel it makes sense to look for opportunities elsewhere.”

Chinese startups pushing into the region include Hangzhou-based Tian Ge Interactive Holdings, which wants to build an internet finance platform in Mexico. Phonemaker Transsion Holdings is preparing to set up operations in Colombia. China Mobile Games & Entertainment Group plans to distribute mobile games in Mexico. Ofo, the Beijing-based bicycle sharing service, is preparing to make its first Latin America foray by entering Mexico, said Chris Taylor, who runs its U.S. operations.

The push by the tech sector piggybacks on years of state-driven Chinese investments in infrastructure in Latin America, with a pool of 2,000 companies pouring more than $200 billion in the region as of January.

When the startups arrive in Latin America they don’t exactly have the place to themselves. MercadoLibre and Despegar.com, both of which are based in Buenos Aires, have become major players in e-commerce and online travel respectively.

For more on Chinese startups, watch Fortune’s video:

Like China’s infrastructure investments in the region, there’s the possibility of pushback from locals. The road to Latin America has also been littered with cautionary tales of crippled projects. China’s automakers have struggled to establish themselves in countries such as Brazil even after building local plants.

“It’s risky and these companies will need to localize their products,” said Tang Jun, a deputy director at the Institute of Latin American Studies at Zhejiang International Studies University. “There will be political environment risk, as many parts of Latin America often go through quick cycles and turbulence.”

That hasn’t stifled investment interest. Alibaba Group Holding and Tencent are scouring for projects, while Didi’s acquisition of Brazil 99 showed deals can get done quickly, unlike the political opposition Chinese companies face in the U.S.

The trend has captured the attention of investors like Santiago-based Nathan Lustig who joined forces with a Beijing-based partner. Together they want to bridge Chinese investors with projects focusing on Latin America. Lustig’s goal is to scoop them up cheaper and earlier.

“We think Chinese acquisitions will be an important exit strategy for startup investors in Latin America,” said Lustig, managing partner of Magma Partners. “This will be a major theme over the next five years.”

Noticias Aguila’s Tang, whose company is formally known as Shenzhen Inveno Innovation Technology Co., doesn’t just want to sell out. His goal is to become the biggest internet company in the region. The company got its start by scraping news sites, mostly independent outlets and social media because it didn’t have the rights to larger publications. It hired locals to help with translation and build partnerships while the team back in Shenzhen developed algorithms to aggregate and sort the news for users.

It took the company about two months to be able to aggregate as least 100,000 articles a day. The next step was signing up media partnerships and now it has distribution deals with seven of the 10 largest publications in Mexico, including El Universal and Publimetro.

Unlike traditional publications that decide what users get to read based on editor recommendations — Tang’s company aggregates, labels and matches content to user preferences. It’s an approach that has found success in China, with the owner of Jinri Toutiao valued at $11 billion, according to CB Insights.

“It all comes down to how accurate you label items,” Tang said by phone from Shenzhen. “The more accurate and detailed the label, the more accurate you can target and push the content that the users want.”

In keeping with the Chinese model of spending to win over users, irrespective of profits, Tang has bought at least $2 million of advertising on Facebook to reach potential customers, even though the U.S. social networking giant is a competitor with its news feed. The app sat at No. 2 among news apps in Mexico in February, a notch down since November, according to App Annie. That’s part of the reason why this year Tang plans to quintuple spending on promotions and work with phone carriers and makers to pre-install its app.

“Organic growth is picking up but we rely on promotions mostly, because we need to expand fast,” Tang said. “That is key.”

Two 11%+ Yielders To Buy After Earnings Reports (REITs/MLPs)

This research report was jointly produced with High Dividend Opportunities co-author Jussi Askola.

We are currently in a raging bull market, and since November 2016, “growth and momentum stocks” have strongly outperformed “value stocks”. Many high-yield sectors, notably Property REITs, BDCs, and Midstream MLPs, were out of favor and became value sectors.

There is plenty of good news that income investors should take into account:

  1. High Dividend Sectors are Cheap! The good news is that today, several high-yield sectors are trading at their lowest valuations in years and currently offer investors a unique entry point.

  2. Value Stocks outperform growth stocks over the long term: Investors should note that over the long term, “value stocks” tend to outperform “growth stocks”. Based on a study by Bank of America/Merrill Lynch over a 90-year period, growth stocks returned an average of 12.6% annually since 1926. At the same time, value stocks generated an average return of 17% per year over the same time frame. “Value has outperformed Growth in roughly three out of every five years over this period”.

  3. Downside Risk is Limited: In a world where equity markets keep trading at “all-time highs” and looking “expensive”, value dividend stocks, such as REITs, MLPs, and BDCs, still trade at very cheap valuations. Therefore, in case of any market turbulence or market correction, the downside potential should be very limited.

Currently, the high yield space is offering some unique buying opportunities. At “High Dividend Opportunities“, we focus on stocks trading at low valuations, or in other words “value stocks”. Today, we highlight two cheap stocks that investors should consider after they reported their 4th quarter earnings – with yields above 11%.

ETP Earnings Report: A Stellar Quarter – Yield 11.8%

Energy Transfer Partners (NYSE:ETP), a stock we recently covered on Seeking Alpha, reported its 4th quarter earnings, swinging to huge profits.

  • Revenue came in at $8.61 billion, up 32% year over year.
  • Adjusted EBITDA totaled $1.94 billion for the 4th quarter, up more than 30%.
  • Distributable cash flow increased by $240 million to $1.2 billion, or 25% higher compared to the same quarter a year ago.
  • The dividend coverage ratio soared to 130% for the quarter and 120% for the year.

In addition, the company raised nearly $2 billion in two transactions that significantly increased parent liquidity. These two transactions included the sale of Sunoco LP common units for $540 million and the sale of the compression business to USA Compression Partners LP (NYSE:USAC) for $1.7 billion (of which $1.3 billion was in cash and the rest in equity). In the meantime, these shares will demonstrate to the market that ETP, as the new partner, is aligned with the limited partner interests of USA Compression Partners LP.

Investors can look forward to more good news this year. Many capital projects have come on-line. That once-ambitious schedule of growth will now result in a lot of cash flow. The acquisition of the general partnership of USA Compression Partners by ETP’s parent company Energy Transfer Equity (NYSE:ETE) opens another avenue of growth. There is great chance that more good earning news is on the way this next fiscal year. ETP’s credit line with the banks now has about $4 billion unused. This could provide an excellent way to acquire more assets and grow in the future.

Valuation

Source: Q4 ETP Presentation

In order to conduct an accurate valuation (using full-year numbers), it is best to back out any “distribution incentive rights” (including relinquishment) and any general partner interest from the “distributable cash flows” (“DCF”). DCF for the 12 months was at $3,494 million; less IDR relinquishment and GP interest of $672 million, we get $2,822 million in DCF.

At the most recent price of $19.21 per share, we get a valuation of 8.0 times DCF, which is a real bargain considering that ETP is one of the largest and fastest-growing midstream MLPs.

The outlook of the midstream sector seems to be solid, with many midstream MLPs having reported solid quarters, including Enterprise Products Partners (NYSE:EPD) and Buckeye Partners (BPL). This can be attributed to record crude oil and natural gas production in the United States.

The future looks bright for the midstream sector. At the current cheap price and yield of 11.8%, ETP is one of our favorite midstream MLPs to own for the year 2018.

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WPG Earnings Report: Operational Resilience vs. Strategic Challenges – Yield 14.6%

Washington Prime Group (NYSE:WPG), a Retail Property REIT, reported its 4th-quarter and full-year 2017 results, and while the market keeps focusing on strategic challenges, we are encouraged to see continued resilience in operational figures.

To give a little bit of context here, we need to keep in mind that we are discussing about a firm that is trading at 4.0x its cash flow, which is extremely cheap in today’s market place. In this sense, the expectations of the market are very negative and the sentiment very low. WPG, just like CBL, is a class B mall owner, and as such, it is widely expected to eventually become obsolete due to the growth of e-commerce.

The perception is that no one goes to class B malls anymore; and yet, the NOI went down by just 1%, the average sales per square foot remains at close to all-time-highs, and the leasing performance suggests strong demand for space by retailers.

A 1% drop in NOI is really nothing for a firm selling at such a ridiculously low valuation, and shows once again that class B malls remain relevant even in today’s highly digitalized marketplace. What the market seems to ignore is that unlike CBL, WPG owns on average higher-quality properties. In fact, Tier One and Open Air properties accounted for as much as 81.2% of the NOI in 2017, and these properties even showed a 0.9% increase in NOI for the year! It is the remaining 18.8% which are causing the temporary dilution in FFO, but clearly, the large majority of the portfolio has great value which is highly sustainable.

This was the main news to us: Operationally, the great majority of the properties are performing just fine. Therefore, the reason why the FFO is dropping year over year is not due to problems at the property level, but rather, strategic decisions such as dispositions and continued deleveraging.

As the CEO notes:

“Very simply, the $0.12 of annual dilution was attributable to our unsecured notes offering, the second joint venture with O’Connor Capital Partners and the disposition of six noncore assets. As the result was an overall reduction in indebtedness of approximately $400 million, it’s silly to question the prudency of such actions.”

Put in other words, the company is improving its portfolio and balance sheet quality to lower its risk profile at the expense of some short-term dilution in FFO figures. Short term-oriented investors may not like it, but this is the best approach to maximize and sustain long-term value. Eventually, as WPG ends its disposition and deleveraging plan, the FFO will stabilize and the market will realize the progress made and reward the firm with a higher FFO multiple. Given that it stands currently at 4.0 times FFO (using 12-month adjusted FFO of $1.63), even a small bump would result in material upside.

Other relevant highlights

  • WPG is making a new acquisition, which was rather unexpected! It suggests that we are approaching the end of the deleveraging plan. Moreover, the property appears to be an attractive investment as a dominant hybrid format retail venue situated in Missoula, Montana. The asset features a Lucky’s Market and a nine-screen dine-in AMC Theater – both newly built – and yields about 10%.
  • The dividend is maintained and remains well-covered.
  • Redevelopments continue, with 36 projects underway ranging between $1 million and $60 million with an average estimated yield of 10%.
  • Property NOI is expected to continue show resilience in 2018.

Bottom Line

Overall, we are happy with the news and glad that the market seems to, for once, agree with us – rewarding WPG with a huge bump after earnings. This is the story of short-term dilution versus long-term potential reward to patient investors. Just like in the case of CBL, we remain optimistic long-term holders and are happy to keep cashing a yield of 14.6% while we wait for upside to materialize.

If you enjoyed this article and wish to receive updates on our latest research, click “Follow” next to my name at the top of this article.

Disclosure: I am/we are long ETP, WPG, CBL, EPD, BPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Here's the Story of the Stanford PhD Who Allegedly Gamed the Texas Lottery (and Won $20 Million)

I wrote recently about the husband and wife team out of Michigan who figured out how to game the lottery, and walked away with almost $27 million over the course of nine years.

But it turns out there’s a greater mystery in the world of lottery watchers. 

Her name is Joan Ginther, and she won the Texas Lottery at least four times in 10 years, while apparently buying thousands if not millions of dollars wroth of tickets.

Oh, did we mention she has a Stanford PhD in statistics, lives in Las Vegas, and yet repeatedly made the trip to a single store in rural Texas to make many of her purchases?

Yes, the plot thickens. And so far at least, nobody knows exactly how she did it.

There are several differences between Ginther’s lucrative story in Texas and that of Marge and Jerry Selbee in Michigan and Massachusetts.

For starters, there’s the fact that while the Selbees are now very upfront about how they made their millions, and were the subject of a very well written report recently on HuffPost, Ginther apparently went underground.

At last report, she lives in Las Vegas, but I can’t find that she’s ever given an interview. My attempts to track her down for this story amounted to nothing.

So, we’re left with reverse-engineering and speculation. 

By far the best attempt to decipher her strategy that I can find came from the work of Peter Murca, a reporter with Philly.com, who wrote about her at length in 2014.

As Murca tells the story, Ginther likely won her first jackpot in Texas the traditional way: blind, dumb luck, walking away with a $5.4 million jackpot in 1993, payable in annual installments over 20 years.

But Murca’s report suggests the experience led her to turn her Stanford training toward the goal of winning the lottery over and over.

And, after spending a considerable amount of time trying to unpack what she did, he comes to several conclusions.

First, he says, she figured out that while the lottery is ultimately a game of chance, logistics made it possible to ease the odds.

In sum, the fact that the Texas lottery had to ship thousands of scratch off cards to stores all over the state, made it possible for people who pay close attention to track how many tickets had shipped, how many prizes were left, and in which stores the likely winners might wind up.

Second, she may have had help. As Murca wrote:

Anna Morales, a worker in the local water department, filed claims for 23 prizes worth $1,000 to $10,000 in seven games from 2009 through 2012 — about as many as Ginther claimed but in half the time. Another $1,000 ticket was cashed by Morales’ husband, Noe, in 2011.

Pure coincidence seems implausible.

Since neither woman consented to be interviewed, and records don’t show who physically bought each winning ticket, let alone whose money was used, explanations for both women claiming so many winners range from generosity to imitation to teamwork.

Third, she apparently played the game of large numbers.

Meaning that over time, Murca concludes she bought a total of $3.3 million worth of tickets in order to win her total $20 million in winnings.

To be clear, that’s an amazing margin, if she figured this out. But it suggests she had figured out a statistical truth that required scale to come to fruition.

And, Murca says, she likely bit hard into her cost of goods, because many of those $3.3 million worth of lottery tickets were winners– just not for the massive multimillion dollar prizes that make headlines.

A few dollars here, a few hundred there, even a few thousand now and again–and Murca concluded the $3.3 million in tickets might have cost her only about $1 million.

To be clear, we don’t know exactly what happened.

The frustrating part about Ginther’s story is that we can’t wrap it up with a nice bow the way we can with the Selbees, or with the MIT students who also figured out how to game the Massachusetts lottery.

Ginther apparently hasn’t given interviews. (If you change your mind, Ms. Ginther, contact me!)

But I think there’s a lesson, even if it’s one I’d never put into personally with something like the lottery.

In every successful business, the founders either have unique access to private information, or else a unique application that can be executed with public information.

The question for any of us in business is: which strategy works best for you?
 

Being A Freelancer Is Not The Same As Being An Entrepreneur. Here's Why

The dream before you take the leap to become a full-time entrepreneur is to have “work-life balance.”

I remember back when I was working my 9-5, a little over a year ago. I had to commute an hour to work each way, which made my commitment closer to an 8-6. And then some days I would need to work late, which meant I wouldn’t leave until 7, or sometimes 8. I’d finally make it home, throw my backpack onto my bed, and sit in my desk chair with the sullen realization that the day was over. I had enough time to cook dinner and do a little late-night writing before passing out and repeating the same dance all over again.

Becoming an entrepreneur, I thought, would give me more time to enjoy some of my other passions.

Being a freelancer is not the same as being an entrepreneur–and here’s why:

Right after taking the leap, and making it known that I was a freelance writer open for business, I quadrupled my income–I am not exaggerating. After building a strong personal brand on the Internet, and mastering the “fast-paced voice” that have driven many of my articles to viral status (100,000 views or more), finding clients wasn’t an issue. Part ghostwriter for CEOs, part copywriter for big brands, and I could work 2-3 hours per day and out earn my previous 9-5 job by a large margin. 

That lifestyle lasted all of 3 weeks.

“You have to take the leap,” I said to one of my closest friends. “Let’s build a company.”

I was under the (naive) impression that building a company was something I could do in those same 2-3 hours each day–except with more upside. 

Not even close.

When my friend (who is my co-founder) took the leap, our first venture failed. And while we kept looking for our next idea, I worked 14-hour days to support both of our overheads. Suddenly, all those things I had originally wanted out of my leap–the freedom to wake up and enjoy the morning sunrise with a warm cup of coffee–were thrown out the window. Instead, I was up waiting impatiently at Starbucks for them to refill my coffee so I could get back to working so we could both eat that month. 

I felt personally responsible for the both of us.

About 4 (exhausting) months later, we found it. We called it Digital Press, and finally, finally, things started falling into place. We made our first hire. And then our second. And with every hire I just kept wondering when that 2-3 hour per day schedule was going to come back around.

Until we hired our 5th person–and I realized I was lying to myself. I wasn’t a freelancer anymore. I was a founder of a rapidly-growing company. And I had just signed myself up for a building process that would take years, not months.

I share this because I notice every aspiring entrepreneur has the same faulty expectations.

You think entrepreneurship is going to be easier than having a 9-5. It’s not.

You think entrepreneurship is going to give you more time to yourself. It’s not.

You think entrepreneurship is going to make you more money, faster. It’s not. (You’re going to end up reinvesting it all into your business.)

You think entrepreneurship is going to give you more freedom. It is, and it’s not.

And your biggest challenge is going to be the thing you assume will be the easiest thing of all, which is work-life balance. 

Instead of starting your work day at 9 a.m. when you walk into the office, it’s going to start at 6:30 a.m. the moment you refresh your email on your phone.

Instead of your work day ending at 5 p.m. when you leave the office, it’s going to end at 1:00 a.m. after you’ve just worked through another chunk on your never-ending To Do list.

And instead of you having some semblance of separation between your “work” and the rest of your life, that line is going to become blurred entirely. You’re going to work on the weekends. You’re going to think about clients while you’re with your family. You’re going to have trouble being present with your significant other. Your entire life is going to be thrown upside-down, and it’s going to be on you to do the hardest thing you’ve ever done in your entire life.

“I’m not working right now.”

Every entrepreneur struggles with this. I see it now more than ever–since I’ve become one. It sounds so easy to draw that line in the sand, but the truth is, we all struggle with it. And we struggle because we care. We care about the work we do, about our partners and our employees and our clients and the future of the company. We care to the point where it becomes obsessive, and eventually that caring starts to turn stressful. 

If you want to become, or are about to become, or have already become an entrepreneur, then you need to admit to yourself that you have no work-life balance. That is the definition of entrepreneurship: you are your work. Without you, the company wouldn’t exist, your clients would buy from someone else, and your employees would work elsewhere. 

Which means, as difficult as it might be, you need to intentionally create that space between yourself and your work–and trust that in doing so, it will actually make the work you do, better.

Can These Small Satellites Solve the Riddle of Internet From Space?

Satellite internet is notoriously expensive, and the business of providing it is notoriously brutal. A startup called Astranis founded by rocket scientists from Stanford University and MIT wants to change that.

The company’s satellites are about the size of a mini-fridge, while traditional satellites are closer to the size of a bus. “Traditional satellites cost hundreds of millions to build,” says co-founder and CEO John Gedmark. “These cost tens of millions.”

Gedmark says Astranis focuses on the software that controls its satellites, which make them more flexible than traditional satellites. By using software-defined radio, for example, the company can more easily change what radio frequencies a satellite uses.

Astranis is joining a new space race led by Elon Musk’s SpaceX and Richard Branson-backed OneWeb to build a new breed of satellite internet network that can reach the entire globe and perhaps compete with more traditional forms of broadband, like cable internet and cellular data services. But Astranis is taking a different approach than other space companies by focusing on bringing down costs.

Traditional satellite communications systems float in what’s called geosynchronous orbit, around 22,000 feet above the Earth. These satellites can provide internet access to remote parts of the Earth, as well as airplanes. But the connections can lag, which isn’t good for real-time applications like online gaming or video conferencing. SpaceX and OneWeb both aim to overcome this problem by launching satellites into what’s called low Earth orbit, which ranges from roughly 100 to 1,250 miles above Earth.

Astranis

The problem is that in order to reach the entire world from low Earth orbit, these companies need hundreds or thousands of satellites, raising the system’s cost. Previous attempts at building low Earth orbit networks ended in bankruptcy, including the Bill Gates-backed Teledesic and satellite-phone companies Globalstar and Iridium.

SpaceX and similar companies, like Jeff Bezos-backed Blue Origin, are trying to reduce the costs of launching rockets, which lower the cost of building such a network. But it’s not yet clear whether these companies could offer internet access at rates that subscribers can afford, and skeptics worry this will end up costing more than just trenching fiber and building cellular towers.

Astranis is sticking to geosynchronous orbit, but it’s building small, cheaper satellites that the company hopes will bring the costs for end-users into the same price range as cellular data.

That plan won’t address the latency issues of geosynchronous orbit satellites, but the company just might be able to bring affordable high-speed internet to places where laying fiber isn’t practical, such as the Pacific islands. Astranis plans to sell bandwidth to internet service providers, rather than directly to end-users. It already has one test satellite in space, and plans to launch its first commercially available satellite next year. Eventually the company could launch dozens or hundreds of satellites; other geostationary satellite communications providers operate anywhere from one to dozens of satellites. Gedmark estimates each Astranis satellite will have a bandwidth capacity of about 10 gigabits per second, which isn’t much compared with a wholesale fiber-optic link, but should be enough to help get remote areas online.

The company received a vote of confidence Thursday from venture-capital firm Andreessen Horowitz, which announced a $13.5 million investment. Andreessen Horowitz partner Martin Casado said the Astranis team was the main attraction. Gedmark has a degree in aerospace from Stanford and previously worked for the Xprize Foundation. Co-founder and CTO Ryan McLinko studied aeronautics and astronautics at MIT, designed hardware for satellite company Planet Labs, and oversaw the creation of the flight-control system for Sierra Nevada Corporation’s Dream Chaser spacecraft. Other team members previously worked for SpaceX, Orbital, and Google.

“Lots of companies understand the software or networking side, but these guys really understood the space side,” says Casado.

Sattelite companies often need billions in capital, but Gedmark wouldn’t discuss how much money Astranis will need to raise to meet the company’s goals. Gedmark says he expects each satellite the company launches to be profitable.

Astranis isn’t alone in trying to find a compromise between gigantic geostationary satellites and networks of thousands of low Earth orbit satellites. O3B, founded by Greg Wyler before he started OneWeb, places satellites between low Earth orbit and geostationary orbit. That reduces latency and cuts down on the total number of satellites needed to provide service. But Gedmark argues that by sticking to geostationary orbit, Astranis is able to reach more places with less gear. “We can send a small satellite out to geo and start making an immediate dent in this problem,” he says.

Space Race