I ran across a liquidation scenario that is a rarity for this blog. It’s exchange-listed and relatively liquid! Unfortunately, evaluating the range of potential outcomes involves handicapping some legal outcomes. I consider most ideas with litigation angles beyond my circle of competence. However, I’d still like to present this idea in case it falls within the bailiwick of any of my extremely intelligent readers.

NII Holdings has a not-so-distinguished history as a wireless network operator in Central and South America. The company has always struggled against better-funded competitors with superior product offerings. NII went through the bankruptcy process a few years back, selling Nextel Mexico to an AT&T subsidiary. Now, the company has announced a sale of its remaining Brazilian operating subsidiary to América Móvil. Following the closing of the sale and the settling of certain escrow accounts, the company will liquidate. The implied value per NII Holdings share was $2.59 as of March 18. This figure is only a preliminary estimate and is subject to change due to fluctuations in the BRL/USD exchange rate, actual liquidating expenses, and the outcome of certain ongoing litigation. With shares currently changing hands at $1.74, shares could offer substantial upside if all goes as expected.

Here is a slide from the company’s recent presentation showing the projected sources and uses of cash.

The Nextel Brazil asset sale is fairly straightforward. Provisions in the sale agreement protect NII from losses due to cash burn at Nextel Brazil between now the the closing of the deal. Nextel Brazil does have some BRL-denominated debt which could fluctuate in value between now and then.

NII’s net financial debt is also fairly simple. In my experience, companies err on the conservative side when estimating liquidation costs. Nobody wants to be the subject of a shareholder lawsuit for providing estimates that turn out to be far too rosy.

The Mexico escrow is where things get dicy. This asset relates to the sale of Nextel Mexico to New Cingular Wireless Services, an AT&T company, in 2015. As part of the deal, one-tenth of the purchase price was placed in escrow against potential tax penalties for years prior to the purchase. A few small tax payments were deducted from escrow, and a portion of the escrow holdback was eventually released to NII. However, $106 million of the original escrow balance remains in limbo with New Cingular Wireless refusing to allow its release. New Cingular claims it has the right to maintain the escrow while certain tax items and audits remain open, while NII claims the opposite. The parties are involved in court proceedings over the issue. NII projects a net recovery from escrow of $75 million. They suggest this amount is a conservative projection, though of course the projections depends on a legal outcome in NII’s favor or New Cingular releasing the balance to NII voluntarily.

In addition to uncertainties over the Mexico escrow asset, exchange rate developments, and actual liquidating expenses, timing will have a major impact on the ultimate outcome for NII shareholders. The Nextel Brazil sale will carry an 18-month $30 million escrow holdback. The company expects to be able to distribute between $1.00 and $1.50 per share following the closing of the Nextel Brazil sale, but investors will have to wait a while for the liquidation process to reach its end.

Allow me to present four liquidation scenarios, ranging from optimistic to dreadful.

The Ideal Outcome: The sale of Nextel Brazil closes as planned two months from now at the end of August, 2019. 60 days after that, the company distributes $1.50 per share, or $152 million. Six months from then, New Cingular Wireless agrees to release the entire escrow amount, of which NII receives $75 million. 30 days later, NII distributes another $81 million or $0.80 per share. 18 months following the closing of the sale, the $30 million Nextel Brazil escrow is released. 60 days later, NII shareholders receive the proceeds as a final liquidating payment of $0.30 cents per share.

In this scenario, NII shareholders will have received $2.60 per share over the next 22 months. Total return to shareholders is 49% at a spectacular 92% IRR.

The Realistic Outcome: The sale of Nextel Brazil closes slightly later than planned six months from now at the end of December, 2019. 60 days after that, the company distributes $1.25 per share, or $127 million. Nine months from then, New Cingular Wireless and NII reach a legal settlement and NII receives $50 million from escrow, with another $10 million to be received 12 months later in full satisfaction of the escrow holdback. 30 days later, with liquidation costs running higher than expected, NII distributes another $40 million or $0.40 per share. 18 months following the closing of the sale, the $30 million Nextel Brazil escrow is released. 60 days later, NII shareholders receive the proceeds plus the final piece of the Nextel Mexico escrow as a final liquidating payment of $0.40 cents per share.

In this scenario, NII shareholders will have received $2.05 per share over the next 26 months. Total return to shareholders is 18% at an attractive 16% IRR.

The Unfortunate Outcome: The sale of Nextel Brazil closes far later than planned nine months from now at the end of March, 2020. 60 days after that, the company distributes $1.00 per share, or $101 million. The legal maneuvering over the Nextel Mexico escrow drags on another year and NII finally settles for just $30 million just to be done with the whole thing. Thirty days later, the company distributes $25 million, $0.25 per share. 18 months following the close of the Nextel Brazil sale, the company receives just $20 million from the escrow account, having paid out $10 million in penalties for some dodgy tax returns in previous years. 60 days later, the company pays a final liquidating distribution of $0.20 per share.

In this scenario, NII shareholders will have received $1.45 per share over the next 28 months. Total return to shareholders is -17% at a distressing -13% IRR.

The Disastrous Outcome: The Nextel Brazil deal falls apart and the company remains locked in its dispute with the AT&T subsidiary over the Mexico escrow. Shares fall 50% over the next six months. Another trip through bankruptcy seems likely.

Clearly, a wide variety of outcomes is on the table here. If after some diligence one comes to believe a positive outcome is highly likely, this could be a very attractive scenario. Personally, I simply don’t know enough, nor do I wish to dedicate the time it would take to feel confident in my assessments. If NII’s share price fell to the point where even the pessimistic scenario offered a good return, perhaps that would change.

Regardless, this will be a fun scenario to watch. Let me know if you have any insights to share.

Alluvial Capital Management, LLC does not hold shares of NII Holdings, Inc. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

Alluvial Capital Management, LLC manages a value investing partnership, Alluvial Fund, LP. If you are a qualified investor and would like more information, please contact us at info@alluvialcapital.com or visit alluvial.capital.