Kook - Decoding Abel Avellan's 2.5 Million Share Strategy

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[00:00:27] Speaker B: This episode is brought to you by Google Chrome. You think you know a browser, but Gemini in Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration blog, or finally break down that long article you've had open for weeks. Gemini in Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses, setup required, compatibility and availability varies, 18+. This is the AST Space Mobile Podcast. It will just basically come to your phone and be seamless regardless of where you are. We don't want the user even to know that it's connected by satellite. Listen, the opportunity that we have is very, very, very large. I just realized I was just talking on mute to myself for 3 minutes, which is super annoying. Um, so anyway, I'm here. Um, I was sitting around kind of waiting for Anpanman to launch his spaces, and then when he didn't show up, I just came to the natural conclusion that he must be dead. So Going to pick up the mantle where he would've left off. And so what I was saying to myself was kind of, A, there's probably a lot of questions. It's understandable people wouldn't know how to read these filings and what's the make of it. And so a prepaid forward is something that I know pretty well. Again, what I was saying to myself, um, other than about how I really wish I were going to bed right now because I'm really tired, is last year when— or I think it was last year when, um, I know, God, it must have been 2024 at this point, it's all a blur— but when ASTS gapped up the first time, I distinctly remember walking around, um, calling my CFO, calling, you know, anyone, like, what should I do? Um, because I had— it was all short-term tax at that point, um, for reasons that were my own fault. Didn't want to sell and effectively pay 50%, so I was looking for solutions, private wealth solutions, to do some smart things. My private bankers, the first thing they talked about with me was a prepaid forward, and I'm really glad I didn't do it because as it turns out, that was the first kind of markup phase of the stock, only for us to then see, you know, even today at $70 is a lot higher than it was at $40. And I believe this is a temporary, uh, drawdown in the stock too. So I think that the real price is, um, a lot higher. Hold on, I see people saying that they can't hear me. Um, hold on. Can you Let me just see here. Kevin's just saying that I'm, I'm still muted. Let me just see if my phone is connected. Okay. They can hear me now. Good. So the way to think about a prepaid forward is imagine you have a stock position, which everyone on this call probably does, that has some collateral value. And so you can go in your brokerage account and just take out a margin loan against that stock if you didn't want to sell it. Now, I think we've already talked a lot about, um, the dangers of, of margin loans. Um, so we can say that this stock is risky. Um, but if you have your 100 shares of stock, the value of that is $7,000. you know, yay. And you can scale that up as much as you want, but end of the day, if you took out a margin loan, you're kind of sweating. Let's say you took out $3,000 of a margin loan and you started to use that money to go pay living expenses, etc., and the stock tanks, which it just did. You know, you, you're a little bit nervous. You shouldn't put yourself in that position. So let's say you still want that $3,000. Well, the thing you could do is you could put a collar on top of the stock. You could buy a put And then you can sell a call costlessly so that the hedge itself doesn't cause any cash outflow for you, but then your position is boxed. And so from your broker's point of view, they're no longer risk. And so you've been able to take out a loan while not exposing yourself to a margin call. Now, the risk with that structure is if the stock flies, you'll regret it because you would have rather have kept your stock. However, you are better off than if you had sold the stock, ignoring taxes, because the strike price of the sold call is going to be higher than the current price. So it's a solution to, uh, have a private wealth issue solved. Um, and so a bell It's really always worthwhile to take a step back. Abel pays himself in a non-dilutive way. He does not take a salary. That would be dilution because that cash would come from somewhere on a company that does not have cash flow. So if he paid himself cash, they'd have to issue shares for that cash. If he issued himself a ton of stock comp, which he has a pretty modest amount of stock comp, you'd be paying for that by way of dilution. His true source of income is the wealth generation of his stock ownership, which he bought by founding the company. And so his— the way he pays himself is from time to time selling stock, uh, through this structure, which isn't really selling stock at the end. It's effectively a margin loan. So he did this last year for 2.5 million shares. He just did it again, uh, for an additional 2.5 million shares. Now, we don't know, uh, the strike prices, but you could go on Bloomberg. I'm not going to do that now because I'm going to go to bed, but you could go figure out and price out, um, what sort of put strike and call strike would net out to be approximately $0 if, you know, if you wanted to. We'll probably get this press release pretty soon anyway. But the net of it is last time he did it, the day it was disclosed, it was also executed because you wouldn't want to leave something like this hanging out. That's pretty stupid to signal to the market like, hey, our CEO's going to do this prepaid forward and everyone in the world knows that that means that the brokers are going to have to put on the offsetting hedges, which means sell stock. Citigroup is going to have to sell stock to hedge. Why don't we give everyone a free lunch so they can front run it? would literally be the last thing in the world you would do. And so 99% chance that they executed this today, which would explain why the stock was extra dumpy. And it was, it actually outperformed all this other space stuff. And what's also interesting to think about is it's almost quarter end. I don't know the exact blackout dates. There's all sorts of rules which govern when a CEO can transact. I don't know the exact dates. I don't really care, but you know that they're kind of coming up against what's a very obvious blackout period, which is the end of the quarter. What they also did, which I appreciate, is they did not do this when the stock was up all-time highs ahead of launch. I don't care if he would've done it. at all-time highs, but it probably would've left a pretty bad taste in everyone's mouth if he had top-ticked right in front of a New Glenn explosion and then in front of Batch 1 launch before we knew Batch 1 was successful. So we got a successful launch. They did the incredible feat of stacking the satellites in an F9 fairing. And then now he's done what is really just estate planning as far as I'm concerned. I had considered, you know, again, I'd considered the exact same structure. It's for a very small percent of his stock. So now you will have a total of 5 million shares in these prepaid forward vehicles. So the first tranche he did in late 2024, and now this tranche, he owns roughly 78 million shares. This is absolutely not a CEO selling out. That's what this is not. And he hasn't actually sold the shares. And so he only parts with the shares if the stock price goes up a lot at the time of expiry, and provided that he does not roll that high-strike call again, which he is empowered to do. Now, if the stock price goes up too much, which he clearly wants anyway because he's owns, you know, the extra 73 million shares that are not collared. Uh, if it goes up too much, you start to lose your ability to roll, um, that option just because it's all intrinsic value. I have some experience with this as well. Um, when I had made the catastrophic mistake of, uh, catastrophic mistake of selling some covered calls, uh, last— God, when is it— last September, um, thinking I was so smart uh, to capture some premium, and then the stock lasted through $100 and I got my face ripped off. I also, like Abel, did not want to sell my stock, and so I was desperately rolling my call options every which way, um, to effectively prevent from getting assigned. Abel will have those same, uh, avenues— I don't want to say options available to him because it'd be, uh, using the word option in the wrong context. He'll have other avenues. He'll have those same avenues available to him in whenever this structure expires, probably 1 year's time. But if the stock is at $250 or something like that, it's pretty hard to roll a call that struck at, just make up a number, $95, when the prevailing stock price is $250. In that instance, the structure will roll off and those 2.5 million shares will be delivered to the counter parties at the upper band of the strike. And at that point, that will reflect an actual sale of Abel's stock at that point in time. But in the meantime, he's given himself lots of flexibility to get the benefit of some proceeds and then having the ability to cash settle that at the end of the Term anyway. So Abel and I are very similar in a lot of respects in that both of us are trying to pay for our lives without selling any ASTF stock. That is certainly the game I play by using these torque structures that I do and, you know, basically trying to just trade around the edges so that I don't touch my core position.
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[00:12:27] Speaker B: Is my experience with ASTS is it really just makes you want to smash anything that is nearby and break it into pieces. That is what we call the kook bottom. And so the stock, you know, I'm just watching people crash out on the internet. The sentiment's getting pretty bad and the stock could just, you know, it's like SpaceX goes up, we go down. SpaceX go down, we go down. It's just par for the course. I'm wondering if this might be sort of a clearing event because you would've definitely had some price impact today from this structure. That's a near certainty because Citigroup would've been out hedging and they would just be getting it done. 2.5 million shares doesn't sound like a lot, but the world works in mysterious ways. When someone is coming in there leaning on a direction, people can kind of sniff it out. I absolutely think that that would have some impact. And then you have these SpaceX guys, which, you know, don't know what they own, seeming like they're freaking out about SpaceX. And so doing whatever they can to hedge anything that isn't nailed to the ground, especially all these guys that have these SpaceX SPVs. We're starting to see ASTS volumes kind of normalize, which means that the ferocity of that selling's coming down. I was checking with some brokers today that see that flow, and that was really their comment to me. I'm still seeing that I'm fully lent out. So I usually don't check that. In the past couple weeks, I've been checking it. There's a lot of price information, or there's a lot of information to me that's valuable when I represent my own stock loan desk, which I find kind of funny. But, you know, it's like I check this HQ, which is like my little side quest to keep me distracted, and I find it hysterical that I own like some portion of the float, which is less than the 13G requirement, I know for sure. And then I'm fully lent out and I'm just like, guys, these shorts don't realize, like, I see what they're doing and I'm not going to sell while I know that they haven't covered. This is a game I'm going to play just for the fun of it. But then ASTS, I see it every day. It's like I am a you know, a source of supply that's meaningful to— for these guys. Um, and so if I'm fully lent out, I don't get paid anything for it, but I kind of know what the positioning is, and that has a lot of value to me when I'm in these sort of acute, uh, phases of really trying to trade it aggressively. And, uh, Reformed Trader does great work. I've been really, uh, following all his little moves, um, all his posts all day because he's really good at finding some of these crucial turning points. And we were thinking that today would probably mark the bottom, if not tomorrow, ironically, before we had the benefit of this knowledge. But then you just kind of go like, you know, bad news travels in packs. That was really the kind of key lesson from one of these guys that sort of taught me a bunch of pithy statements. His name was— What was his name? I think it was Arthur Pettit at Pequot. So a fund that— yeah, I think it was— I can't remember the guy's name. It shows that I'm not doing him justice. But, um, there's this portfolio manager at Pequot, which is a fund that no longer exists, and he taught us a lot of stuff. And he would always go, bad news travels in packs. And it kind of does, you know, when it, when it rains, it pours. And so seeing, you know, a, a Nobel, um, kind of estate planning transaction when everyone's already kind of panicking and sentiment's at rock bottom is kind of the market clearing event that I would generally be looking for. And so I'm setting up for anyone that cares, you shouldn't, but since we're on the phone, um, I'm setting up for an exciting summer. This is kind of the exact pattern that, A, I did not expect. because I didn't expect New Glenn to blow up on the pad. I was really confused about what the net result was going to be from SpaceX. I feared that it would suck the market, the energy out of the market. But I didn't act upon that because then, you know, my first principle said, well, you're going to have a lot of people learning about space and, you know, who knows? And I'm not going to trade my core position anyway. So I was just going to sit here and eat it, which I am. But now we've had like a complete reset and, you know, Abel would not be doing this if there's bad news coming. That is what I could bet my life on, is this CEO has such loyalty to his shareholder base that they just would not do that. And so one thing for me is he wouldn't have done this unless the coast was clear for some good things. So that's my 2 cents. So I was adding today again, um, in this, um, structures that I use, uh, that I call Torques, which is really just selling a put spread to buy an out-of-the-money call. I was, uh, being pretty aggressive on that, uh, today. But I hadn't done my full size because I was gonna wait and think about it. Um, but now this again might be the clearing event. So to recap, a prepaid forward is really just getting a margin loan against your stock, but in a safe way because you buy a protective put, but you fund it by selling a call. It's Abel's way to get some liquidity without having to commit to selling stock. He retains the flexibility in the future to roll the structure if it's within a certain band of prices that give him basically some room to play with based on where volatility is and based on how in-the-money either side of the trade is. Um, he's done it before. It's identical in the general structure that he did last time. We don't know the strike prices yet, but again, we could go on Bloomberg and figure it out real fast. And I would, you know, I really appreciate that he didn't add this complexity to the community by doing this before the launch. And it's really kind of a gentleman's move as far as I'm concerned to have done this after the launch. And I view it as just one more expression of respect toward retail shareholders, which I know he focuses on. I know he cares about. So That's really what I have. And I'm going to probably just end it and go to bed. But I hope that's helpful for anyone that was a little bit confused how these work. Again, the structure is straight out of the playbook that any high net worth private banker would be showing their clients. Abella is a client. I've evaluated the structure. It wasn't appropriate for me. Why would I want money today when I could just YOLO the stock and wait for tomorrow? Which is a choice that I do not regret. And I feel like these types of actions by Abel also continue to show his belief in the upside of the company. But never forget, this is a guy who has not taken any money out of the company, and he has real expenses too. You know, he certainly has a nice lifestyle, But when you own, you know, what is it, $7 billion of stock almost, like $4, whatever it is, $5 billion, you know, he needs to have some liquidity. You don't carry that type of gross asset exposure with all the little tax surprises that could come and just estate planning complexities and not think about that. And literally today I was working on my own trust and estate staff, uh, and I'm younger than Abel, but you just kind of do this stuff, um, and then you need some cash for it. If you, you know, you never know how long the estate tax exemption is going to last. You got to start funding some of that stuff up. And so I really sympathize and empathize with the types of things Abel is probably talking to his bankers about because I'm having those exact same conversations and I'm seeing those exact same solutions. provided. I am not doing those things because they're not right for me, and I can do them by myself in my account. But, um, there's nothing that would, uh, alarm me by seeing this. And I would note that it's very different from how a lot of other executives have acted. We've seen enormous stock sales by the guys at like Intuitive Sciences, the Lunar guys. We had Rocket Lab CFO blowout of $100 million of stock. Now that would scare me shitless if I saw something like that. Didn't stop Rocket Lab stock, but it would still really scare me. Uh, you have not seen Abel effectively pay himself at the expense of shareholders. He hasn't diluted us for his own compensation. He has paid himself through stock price appreciation by using ASTS as his investment vehicle. and really allowed us to benefit from him acting like a top-tier Jeff Bezos-like CEO. Jeff Bezos has had the same attitude, didn't give himself stock grants because he figured, I have enough and that's the deal. And really kind of a top-class corporate governance philosophy that Amazon had. could see what the result was there. And one of the things that I like the most about AST SpaceMobile is the executive compensation model and the alignment it creates for shareholders. It was really what gave me extra dose of confidence in what is such a, especially what was such a risky endeavor and what is increasingly a de-risked endeavor. But that notwithstanding, corporate governance matters a lot. And if I started seeing like a lot of piggy type of actions by the executives, it would really turn me off and it, I might reconsider position sizing and, you know, my general thought process around the investment. But we have had top-tier corporate governance on the issues that I care most about, which is going to be alignment of executives. So I'll end it there. Hope everyone has a wonderful night. If you're a long-term investor, hope this was helpful in just clarifying what the structure was. If you're a short-term flipper, good luck. I can't help you. You're on the wrong call. But if you're a long-term investor, good luck. Maybe sleep in tomorrow. Who knows? It looks like the market's getting crushed. But markets have a funny way of reversing overnight, so I'm not going to trouble myself with it. And I will talk to everyone soon.
[00:23:38] Speaker A: Bye.
[00:23:46] Speaker B: Thanks for listening to the AST SpaceMobile Podcast. If you enjoyed this episode and you'd like to help support the podcast, please share it with others, post about it on social media, or leave a rating and review. To catch all the latest news about AST SpaceMobile, make sure to subscribe. Thanks again for listening. again, and I'll see you next time.
[00:24:05] Speaker A: Listen.
[00:24:12] Speaker B: Mmm, waffles.