Aether hasn't quite figured out what it does for a living

August 10, 2005|By Jay Hancock

DEAR USA Today: Aether Holdings is not an Internet company.

It does not belong on your "Internet 50" stock index or on your "e-Consumer 25" list with eBay, Google, Intuit and Amazon.com, where it has been listed daily for years. Aether hasn't been a technology company since September, when it sold its last two wireless communications divisions.

Exactly what Aether is, however, has gotten murky again. Billion-dollar wireless powerhouse? Nope. Modest mortgage banker? Not that either, apparently.

Barely profitable and poised to shift its business focus for the second time in less than two years, the Baltimore company seems to enjoy continued patience from its shareholders. But that patience won't last forever.

It's already strike two: Alan Greenspan and the bond market have sabotaged Aether's foray into the mortgage market.

Seizing on the difference between short- and long-term interest rates, the company planned to borrow at 3 percent, finance mortgages at 6 percent and pocket the difference tax-free, thanks to gargantuan losses racked up when Aether was a high-tech outfit that can be used to offset liabilities on taxable income.

But Greenspan raised short-term rates. The bond market, against almost everybody's expectations, kept long-term rates substantially the same. The canyon between borrowing and lending disappeared, and so did the chance for easy money.

"Very challenging market conditions" was how Aether Chief Financial Officer David C. Reymann termed the situation in a conference call last week. And how: Aether's gap between financing costs and mortgage income was only a little more than 1 percentage point last quarter.

So the company is contemplating Plan C, another attempt to convert about $1 billion in accumulated losses into tangible value in the form of tax-sheltered profit and an increase in Aether's stock.

In theory, Aether's net income could compound tax-free inside the company until the 2020s, when the company's $777 million in operating-loss "carry-forwards" disappear. Aether also holds $283 million in carry forwards that it can deduct against potential capital gains. Those go away in 2010.

But Aether stock is trading these days as if these advantages didn't exist. At $3.60 per share at yesterday's close, the stock goes for only a little more than the $130 million breakup value of the company - that is to say, for what the taxable assets are worth.

Aether and its shareholders want to start reaping tax-free profits and boost the stock's value in the same way that a tax-free municipal bond is worth more than a taxable corporate bond paying the same interest. (The analogy isn't exact: Muni-bond interest is tax-free to the individual investor; Aether's profits would be tax-free only as earnings retained inside the company. But you get the idea.)

Properly executed, the strategy might double the stock price, contends Jason Stankowski of Clayton Capital, a California hedge fund that holds Aether shares.

"It was impressive" that Aether put the brakes on the mortgage strategy, he said. "They were smart enough to step aside in a pretty ugly mortgage-backed securities market."

Aether isn't revealing much about the next step, but "you have to assume that we're getting pretty close at this point," Reymann said in the conference call. "There are literally dozens out there that we'll continue to evaluate," including buying an operating company, lending money, going into real estate or even continuing the mortgage strategy, he said.

One option that's not on the table is selling Aether to someone else; that would substantially reduce the tax deductions.

But whatever happens, execution will be key and difficult. There is no such thing as a cheap income stream these days. Any kind of asset you can think of - junk bonds, Treasuries, real estate, stocks of all kinds and sizes, commodities - has been bid to the moon.

"If you're sitting on $150 million, and you don't know what to do with it, a lot of people are going to want to help you," says Stankowski. "And believe it or not, not all of them are going to have your and your shareholders' best interests at heart."

On the other hand, Aether's carry-forwards, if we assume they were applied in a straight line, would let it shelter nearly $40 million a year in profit between now and the 2020s. It's never going to make that much, but so far this year the company has earned only $120,000. Time to get cracking.

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