The Corporate Restructuring Report-IDT Corporation (IDT) & Rafael Holdings Inc (RFL)
On March 26, 2018, IDT Corporation (NYSE:IDT) completed the tax-free spin-off of its commercial real estate and pharmaceutical business into a separate public company, Rafael Holdings Inc. (RFL). The parent retained the core telecom, payment services and related businesses. The spin-off makes sense given the fact that Rafael businesses are non-core and have little synergies with the core telecom business.
IDT's flagship Boss Revolution calling system, which accounted for ~33% of overall sales (as of 2Q18) continue to face headwinds amid increased adoption of over-the-top voice and messaging, unlimited calling plans, as well as decreased immigation into the US. These are secular trends and will continue to negatively impact results in our view. The growth avenues (particularly net2phone UcaaS, international money transfer and national retail solutions) lack scale to provide any meaningful fillip to the topline and earnings in the near medium term. We believe challenges in core operations will continue to weigh on IDT's stock. However, high cash (~36% of market cap) and high dividend yield (~5.4%) should limit the downside risk.
We see RFL's interests in pharma companies as a major driver of sales and earnings in the future. It's subsidiary, Rafael Pharmaceuticals is a clinical-stage oncology-focused company with promising data for clinical trials of its lead drug candidate, CP-613. The U.S. FDA approval for pivotal study and orphan drug designation bodes well for the company. The value of cash and real estate combined exceeds the current value of RFL, suggesting no value being ascribed to the pharma business. Though the potential returns can be attractive, it also carries high risks given the lack of any commercial product. We suggest only inestors with high risk appetite to consider the stock.
In our view, IDT (ex RFL) is fairly valued and RFL is undervalued.
IDT operates primarily in the telecommunications and payment industries. The company has two reportable business segments: Telecom and Payment Services and net2phone. The company's Telecom and Payment Services segment provides retail telecommunications and payment offerings as well as wholesale international long-distance traffic termination. The company's net2phone segment provides unified cloud communications and telephony services to business customers.
Rafael Holdings owns interests in commercial real estate assets and clinical stage pharmaceutical companies. The company's business consists of two reportable segments: Real Estate and Pharmaceuticals. The commercial real estate holdings consist of the building in Newark, NJ that serves as headquarters for the company and certain affiliated entities, car public garage, an office/data center building in Piscataway, NJ and a portion of a building in Israel. The pharmaceutical holdings include Rafael Pharmaceuticals, Inc., which is a clinical-stage, oncology-focused, pharmaceutical company and LipoMedix Pharmaceuticals Ltd., which is a clinical-stage oncological pharmaceutical company based in Israel.
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