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

Mariusz Skonieczny submits:

IDT Corporation ( IDT ) is a company that has caused investors lots of pain and joy depending on when they purchased their shares. From the following price chart, you can see that it was trading as high as $41.84 per share on September 18, 2006, and as low as $0.71 per share on December 19, 2008. Now, it is back at around $25 per share.

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Business Description

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:

Source: IDT Corporation's Investor Presentation

There are three main parts: IDT Telecom, Genie Energy, and Other.

IDT Telecom

Through IDT Telecom, the company provides various telecommunications services, including prepaid and rechargeable calling cards, a range of VoIP communications services and wholesale carrier services. Through this segment, it also provides consumers local and long distance phone services.

Genie Energy

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 customers 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.


Under the "Other" segment, the company owns interests in Fabrix, Zedge, intellectual property and real estate.

Why Did the Stock Originally Collapse?

In the early 2000s, IDT Corporation sold off Net2Phone to AT&T ( T ) and, as a result, had over $1 billion in cash. The former CEO wasted it by investing it in many unproven ventures while not really placing much emphasis on running the business in a profitable fashion. Soon, 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 also received a delisting notice from the New York Stock Exchange as its market capitalization fell below the required level.

Why Did the Stock Recover?

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. Soon the business started turning a profit and its cash position started to grow again. The stock began to recover.

Why Is There Still More Room to Make Money?

Even though the stock price increased significantly since its lowest point in late 2008, there is still more opportunity to make money by investing in IDT. From the valuation point of view, based on the price you pay for the stock, you are getting much more in value. The following chart shows how much some of the segments are worth:

Source: IDT Corporation's Investor Presentation

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 (23 million shares). This assumes multiples of 3.5 and 5.4 times EBITDA, which are low, but I believe this is justified considering that sometime in the future products such as prepaid calling cards, which represent a significant source of revenue, might not exist anymore. In the near 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 such as Pennsylvania and New Jersey. However, to remain conservative, we will go with these multiples and estimate the value of this segment at $7 per share.

IDT also has $250 million in cash on the balance sheet, which is worth about $11 per share. So far, we have $10 per share for IDT Telecom, $7 per share for IDT Energy, and $11 per share of cash, for a total of $28 per share.

Today, you can pay about $25 per share for the stock of IDT and get $28 in value per share. But this $28 of value does not even include Genie Oil & Gas, Fabrix, Zedge, intellectual property, or real estate. You get all of these for free. However, some of these free options could be worth quite a bit in the future. Let us take a look.

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. In other words, 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, but now we are demanding more. We want to consume any kind of content, at any time, and on any device (TV, computer, or phone). Consequently, 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. However, it is not costing the parent company any more because it is now operating on a break-even basis. That being said, we can still put a rough estimate of value based on what is already known. During the Investor Day Presentation, Jonas hinted that [[IBM]] and Dell ( 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 in the future. The management states that we are just at the beginning of the multi-billion dollar developing market and Fabrix has the leading technology. Currently, Fabrix is targeting companies that sell to customers 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 before, Fabrix just started breaking even -- but this is about to change. In August 2010, a major cable operator, Cablevision ( CVC ), 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 customers located in the Bronx. This is obviously not reflected in IDT's financial statements yet.

Even though Fabrix has the potential to become a valuable asset for IDT, the market is assigning it no value. If its potential is realized, it will be a big winner, and if not, then there is no loss because we got it as a free option.

Zedge is a Norway-based company that provides a web-based, worldwide destination for the discovery and distribution of mobile content. Users go there to download wallpaper themes, ringtones, videos, texts, games, and soon, apps, for free. The site generates money through advertising.

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

Source: IDT Corporation's Investor Presentation

It is difficult to estimate exactly what it is worth today, but considering that it has 40 million unique visitors per month, it is definitely worth something. On September 23, 2008, Shaman II LP paid $1 million for 10 percent of Zedge. This implies that to these buyers Zedge was worth $10 million in 2008. Then, in March 2010, Shaman II LP paid $300,000 for an additional 1 percent ownership in Zedge, which implies that the value of Zedge to these same buyers increased to $30 million.

But in March 2010, Zedge had only 20 million unique visitors per month, and now, it has 40 million unique visitors per month. Considering that the number of users doubled since that transaction and the growth rate as shown in the graph appears to be accelerating, it would not be outrageous to conclude that Zedge may be worth about $60 million. Because IDT owns 81 percent of it, this translates into $49 million or $2 per share.

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

However, management is talking about increasing the number of users from 40 million to 500 million and eventually, to even a billion. Just to put things in perspective, Facebook has about 500 million users. If Zedge achieves 500 million users, it will become very valuable. The CEO joked that instead of IDT spinning Zedge out, Zedge will be the one spinning IDT out.

But is it possible to get to 500 million or a billion users? The management believes it is. Jonas argues that Zedge will be able to get to this number by offering free apps. Currently, Zedge attracts 40 million users by letting them download free wallpapers. Soon, it will start offering users free apps, and because people love apps and there are thousands of them, he says, this will drive traffic to these new levels.

Then, once Zedge starts offering apps, people will be using the site to search for the apps of their choice and when they perform these searches, Zedge will know exactly what they are searching for. This will be powerful information that will allow Zedge to target advertising that relates to these particular searches in a similar way that Google targets its advertising. Jonas said that this is where the big money will be made.

Similar to Fabrix, Zedge is completely ignored by the market even though it is not hard to see that it could become a big winner for IDT. Are the management's goals reasonable and will they be realized? I do not know, but I think of Zedge as a free option. At the price of $0, the price is right for me!

Real Estate

IDT Corporation owns a property at 520 Broad Street, Newark, NJ, which it used to occupy as its headquarters. After the company cut 80 percent of its workforce, it did not need as much space. Therefore, it vacated the property and leased 75,000 square feet of space at 550 Broad Street.

The property is a Class B downtown office building with 500,000 square feet of space and an 800-car parking garage. It was built in 1956. IDT is currently working on realizing value from this real estate. Assuming the property can be fully leased at a rate of $20 per square foot, it is worth about $80 million. After subtracting $26 million for the mortgage, this equates to a value of $54 million or a little over $2 per share.

While the property is valuable, it is important to realize that the $2 per share might never be realized. The property is mostly vacant, and IDT has to pay all the expenses associated with owning it, including the mortgage payment. Instead of being an asset, this property is draining resources and is more of a liability. Because the mortgage is non-recourse, I would not be surprised if the company decides to give the property back to the bank. Consequently, I am assigning $0 value to this real estate.

IP - Intellectual Property

IDT Corporation owns VoIP (Voice over Internet Protocol) 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 after 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 absolutely no idea what this could be worth I am assigning its intellectual property a value of $0.

Net Operating Losses (NOLs)

Because IDT experienced losses in the years before the turnaround, the company has federal and state net operating loss carry-forwards of approximately $225 million as of July 31, 2010. This translates into additional value of nearly $10 per share. This carry-forward loss is available to offset future U.S. federal and state taxable income. In order to take advantage of these net operating losses, IDT will have to stay profitable going forward, and since the turnaround process is now complete, this should not be a problem.

Genie Oil & Gas

Through Genie Oil & Gas, IDT has ownership interests in American Shale Oil ((AMSO)) and Israel Energy Initiatives (( IEI )), as shown in the following illustration:

Source: IDT Corporation's Investor Presentation

IDT owns 50 percent of AMSO and 89 percent of IEI. Through these two ventures, the company is attempting to produce oil from shale on a commercial scale.

In 2005, the U.S. Bureau of Land Management began the implementation of the Energy Policy Act passed by Congress, seeking proposals from the private sector to develop oil shale resources in economically and environmentally responsible ways. AMSO was selected with two other companies, Shell (RDS.A) and Chevron (CVX), to be involved in this project.

Consequently, effective January 1, 2007, it received a 10-year lease for research, 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 technology, it will be able to convert the initial lease to a commercial lease with 5,120 acres that contains approximately 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 approximately 238 square kilometers in the South of the Shfela region in Israel. The area holds approximately 40 billion barrels of oil equivalent. After the company demonstrates commercially viable technology, it will be able to apply for a 30-year commercial lease from the Israeli government.

Through two long-term leases, IDT could potentially control a total of 50 billion barrels of oil equivalent (10 billion in Colorado and 40 billion in Israel), which would be extremely valuable. To put things in perspective, Exxon Mobil (XOM) has a resource base of over 84 billion barrels of oil equivalent. IDT's CEO states that if the shale project materializes, the company could be worth half as much as Exxon Mobil Corporation or approximately $200 billion. This would translate into a stock price of $8,700 per share versus $25 per share today. This is 348 times the current stock price.

Looking at these numbers, it is hard to believe that such a huge return is even possible. It seems like such a huge gamble if you consider yourself to be a conservative investor. But how can this be a gamble if you are not putting up any money?

Remember, from the previous section: If you buy IDT at today's prices, you are not even paying for this "lottery ticket." It comes as a free option. I do not play the lottery, but if you buy me the ticket, I will take it.

However, there are some very smart individuals who put real money into Genie Oil & Gas so that they can have the possibility of making these huge returns. On November 15, 2010, IDT announced that Rothschild and Rupert Murdoch have each purchased equity stakes in Genie, paying $11 million for a 5.5 percent stake. Based on this price, we can conclude that Genie might be worth $200 million or about $9 per share.

Whether it is possible for IDT to be worth half of Exxon Mobil is not really important. What is important is that if IDT succeeds, the oil shale project will be a huge winner for IDT and its shareholders. Despite the tremendous potential, oil production from shale is years away. Hopefully by 2018, it will become a reality.

In the meantime, to demonstrate the commercial viability of its technology 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.

IDT's team came up with a different method, which consists of heating up the rock in the ground and extracting oil from the ground in liquid form. This method is cheaper and more environmentally friendly. It costs about $25 per barrel. With oil at over $100 per barrel, there is a decent margin to be earned.

Bringing the oil shale projects into commercial production will require capital. As a result, the market is worried that IDT will squander its cash on this project, which may never materialize. What the market is missing is that the majority of the capital will not come from IDT. If you go back to the previous chart, you will see that IDT only owns 50 percent of AMSO. This is because the company brought in a partner, Total S.A. (TOT), the French oil giant. Total S.A. owns the other 50 percent and is putting up the money to bring oil shale into commercial production.

From the same chart, you can also see that IDT owns 89 percent of IEI, which means that it does not have a financial partner similar to Total S.A. -- at least, not yet; the company is in the process of recruiting a well-capitalized partner who can take care of the bills in return for some potential action.

Sum of the Parts

If we conservatively account for the values of all of the parts, this is what we get:

Source: IDT Corporation's Investor Presentation

Per Share
IDT Telecom $10
IDT Energy $7
Genie Oil & Gas $9
Fabrix $3
Zedge $2
Real Estate $0
Intellectual Property $0
Cash & Investments $11
Net Operating Losses $10
Total Value $52


From the sum of the parts valuation, we can see that IDT is worth more than twice the price at which its stock is currently trading. The market is assigning virtually no value to the oil shale project, Fabrix, Zedge or intellectual property even though these segments should carry some value.

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 next, 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.

Lines of Business - Pre Spin-off

Source: IDT Corporation's Investor Presentation

Lines of Business - Post Spin-off

Source: IDT Corporation's Investor Presentation

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 also have to invest in the oil shale project. But what if you simply do not want to be involved in the oil shale business?

On the other hand, if you want to invest in the oil shale venture, you also 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.

It is hard to say what price the new IDT Corporation will trade for, but if we assume a dividend yield of 4 percent, we will get a stock price of $22 per share. If we assume a dividend yield of 3 percent, we will get a stock price of $29 per share. At first, it might trade at a high dividend yield which means that the stock could trade below $20 per share, but, over time, it should adjust higher.

What will Genie Energy, with IDT Energy and Genie Oil & Gas, trade for? We established that IDT Energy is worth $7 per share, so it should not have a problem with trading for this much. However, the goal of this spin-off is for the market to assign some value to Genie. What will that value be? Your guess is as good as mine.

However, if it assigns a value of $9 per share based on what Rothschild and Rupert Murdoch paid for their 5.5 percent stake, then Genie Energy will trade for $16 per share. Plus, Genie Energy will be spun off with some of the $11 per share of cash. The management stated that the cash might be split equally between the two companies, which would mean that Genie Energy could get $5.50 of cash per share. If the market values this cash at only half of $5.50 per share, then we might get a stock price of something in the neighborhood of $19 per share.

If the market prices the new IDT Corporation at $29 per share (3 percent dividend yield) and Genie Energy at $19 per share, we will get a total of $48 per share. And, when Fabrix, Zedge, or oil shale realize some or all of their potential, then both of the newly created stocks will trade at much higher prices.

Besides the upcoming spin-off, another catalyst that is likely to push the stock price higher is the fact that research analysts are starting to cover this stock, thus generating more exposure among the investing community.


Even though the stock price of IDT Corporation increased significantly over the last two years, it is amazing that the potential for future returns remains large. The first pop is likely to occur after the spin-off. Additional value might be realized when some of the free options such as Fabrix, Zedge, and oil shale, reach some or all of their potential.

Disclosure: I, or persons whose accounts I manage, own shares of IDT Corporation. This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing or disposing shares of IDT Corporation. You are advised to consult your financial advisor or conduct the due diligence yourself.

See also Telefonica: Company With High Dividend Yields, Low Payout Ratios on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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