A 1236% return in eleven years—Ted Weschler didn't just beat the market. He crushed it. He killed the market with his strategy of helping high-quality companies in temporary distress. While his investors did well, the market lagged behind his performance, being flat.
Let's look at one of Peninsula Advisor's first investments, where a struggling asset-rich company became a decade-long investment yielding immense profits.
In 2001, the world was reeling from the dotcom crash. The fallout spread beyond startups to fiber networks and wireless spectrum.
While investors chased dotcoms, the real winners were the companies laying the groundwork. Fiber networks, wireless spectrum, and other infrastructure assets became great investments. American Tower and Level 3 are standouts in the value investing world.
Unlike internet companies, these investments worked because they were hard assets. Demand was falling off a cliff, but if you believed the internet would be used at all in the next ten years, these investments could work out. They already were built out and had the necessary capital expenditures spent, required little in the way of maintenance care, and had tons of operating leverage. Picking the winners and losers here would prove to be more fruitful than hunting for internet stocks.
Recognizing this opportunity, Ted Weschler placed several bets in this struggling industry. His fund had a bit of "dry powder", having launched a couple years earlier, but wireless data and traffic were beginning to grow. There were signs of a recovery in the infrastructure destined to power the internet for decades to come.
In comes Advanced Radio Technologies, a troubled telecom provider who was founded in 1993. They raised $500MM to build out a wireless network focusing on 39Ghz connections. By 2001, they were forced to file Chapter 11 after overspending on operations and acquiring spectrum licenses.
By this point, they were a shell of a company. They owned over 700 FCC-granted licenses. They wound down all operations and let go of the employees.
Ted Weschler and a few other distressed investors came in, and bought up senior paper. They helped steer the company out of bankruptcy, and negotiated for what would become a 23% stake in the reorganized common stock, with warrants to purchase another 8.5%. Peninsula Advisors bought $38MM in distressed debt for just $18MM. In return, Weschler secured 6.32 million shares and warrants, bringing his cost basis to $2.85 per share.
Out of bankruptcy, the licenses held a $50MM valuation— less than half of their original price. In 2000, Advanced Radio Technologies' chief rival Winstar bought 931 licenses for $161MM. Teligent, another competitor, was sold and had their licenses valued at $50MM. Common shareholders thought Advanced Radio Technologies' licenses were worth closer to $150MM (based off of a discount to a Morgan Stanley report mentioned a $230MM number). From Weschler's point of view, these licenses had downside protection with the optionality of monetization.
In 2004, First Avenue extended its advantage in wireless and began expanding operations by acquiring Teligent. Teligent had a similar block of licenses at a lower frequency, but also had equipment and customers. To finance this acquisition, First Avenue raised money via a private placement.
In 2006, FiberTower was brought into the mix via a stock-swap acquisition. They were a private company who was growing by aggregating spectrum assets, and re-selling to AT&T and T-Mobile. They were doing well, but didn't have the national footprint First Avenue had. Through what a reverse merger, FiberTower and First Avenue Networks combined into a single entity.
Ted Weschler stepped down from the board of directors. The implied value of First Avenue Networks was $10.50/share, or $1.5B. A nice recovery from the bankruptcy five years earlier. Peninsula's stake would have been valued at $67MM, and would grow from there.
To review, in 2001:
Over the next five years, Peninsula Advisors and Ted Weschler would reorganize this shell of a company into a rapidly growing telecom company worth over $1.5B.
Over the next six years, Peninsula Capital did a lot of buying and selling. From 2006 to 2009, they sold a net of $25MM. From 2009 to 2011, they sold a net of $61MM. Notice I mention net. There were several times, such as in the depths of 2008 and late 2009, when Weschler increased Peninsula's stake in the company. Ted knew the company's strength and doubled down in a turbulent market.
However, in 2011, FiberTower ran into trouble.
Their main customer was AT&T. Being the monopolist, they decided to retract their business from FiberTower. AT&T and T-Mobile accounted for 63% of FiberTower's revenue and wanted to upgrade their backhaul network to fiber while owning the infrastructure themselve. This sent the shares into a freefall. The shares went down 60% in a single day after they announced missed interest payments and a litany of board resignations. In 2012, FiberTower declared bankruptcy. By this time, Ted had moved on to Berkshire Hathaway.
AT&T later acquired the struggling company for pennies on the dollar.
First Avenue Networks is right out of the Weschler playbook: