August 24, 2010

GLOI: Special Situations

This is a liquidation opportunity I have been following since they announce intention to sell their operating businesses. To see an overview of the opportunity, and to avoid repeating the deals, please see this post. What I will try to do here is to assess the liquidation value and answer if there is enough margin of safety to be considered a sound investment.

Issues to consider:
  • Dilution Issues: Management (CEO and CFO) will have 516,000 shares vested and granted under their long term compensation plans due to change of control. This will dilute my ownership by 3.5%. I reckon there is no potential for other dilution issues going forward.
  • Taxes: As it stands right now there is tax issues as most sales occurred below book value. It will depend on the earn-outs amount but I think the taxes will be non issue.
  • Management Payments: There is $3,381,000 to be paid CEO and CFO for change of control clauses, bonus, and Rabbi trust in their employment agreement.
  • Real Estate leases: The company HQ is leased on month to month basis and will not pose any significant costs during the liquidation period.
  • Burn rate: I estimate that the company to have a burn rate of 2000,000 by next year end between the following components:
  • CEO/ CFO salaries: $955,000 (including bonus to CFO)
  • HQ lease: : $225,000
  • Legal fees : $200,000 (this separate from transaction fees as I netted those against the sales proceeds)
  • Other: $600,000
  • in the worst case scenario I will assume the burn rate will double to $4,000,000.
  • The holding company will be be liable for the credit line, which as of June 30, 2010 was $4.1 Million. This is offset by cash on hand of $3.8 million. Please note that in June 30 statements they have already closed on Rosetti transaction so there is $2.9 million that has already received that need to be netted out.
The following is a listing of what amounts that will flow to GLOI from the all transactions:

Please note that earn out could be higher but I based it on rolling unit revenue over the last 4 quarters.

So if we put together all items above with the best and low case estimates I can have the following potential values of liquidation:

All these buyouts are management lead buyouts. that signifies to me that the business is good and the potential of the earn outs to materialize is solid.

  • What I did not did not require any special insight or knowledge to unearth the potential. So what does the upside exist? I think the market is not discounting all the potential earn-outs. Current market value of the company is equal to the current distribution. Also I think the company is too small to be on any-one's radar.
  • CEO and CFO share sale, why? The timing of the sale came before the Bode transaction announcement. However transactions do not materialize over night. so why did management sell if the potential to earn higher value for their share down the road? I tried to research as much as possible but could not get anything. the only thing left is to get in the mind of the CEO and CFO.
  • There is no word on liquidation and how? so if management have a change of heart and decides to buy another business, then the thesis is over.
  • WC adjustments that may go against the company.
A 15 months opportunity that offers a good margin of safety. I estimate that if all earnouts are not received then you will receive 10-13% return. If some earn out materialize then the potential to earn north of 20% is an outcome with high probability.


Anonymous said...

Interesting opportunity. What I don't get is that the company says they'll pay out $23-25 million this year and then $0-24 million from the earnouts and escrow. But given the upfront payments from the business sales in July should be $16.5 million and the upfront from Bode is $22 million that's $39-40 million in cash on hand. So where's the other $15 million going? Surely they can't burn thru $15 million in the next year?

Anonymous said...

The analyst on the conference call pressed them on this point (transcript is on the recent 8-k- wish more companies did that!). It sounded like they wanted to hang on to cash to cover any contingencies. But even with a generous estimate for those it would seem the initial distribution could be higher. The question really is how much to trust management. They don't have large ownership stakes so they don't have a huge incentive to liquidate, which is a very dangerous thing in these situations. So the lowball estimate could be just being conservative or it could leave the door open for them to say later on- hey we want to keep the company going and will hold on to the cash beyond the $25 mill to "explore strategic alternatives". That might be the source of the large discount the market is giving this deal and that is what is holding me back here.
Another thing I found odd is that they filed an S-3 for Vicis to register to sell their stake a few days ago. I am not so familiar with this type of filing. Was this needed b/c they want to sell in a private placement or there is some restriction on their selling? I know Vicis has had some redemption issues and this may be forced selling, but the timing seemed odd.
Would love to hear any thoughts on these issues.

Anonymous said...

I don't know Vicis but I do know the other selling group. In general, Michael Liss and Jason Adelson are two characters I do not put a whole lot of trust in. Not exactly shady but definitely looking out for themselves ahead of anyone else. They're also not the type to hang around for an 18 month payout so I can understand them choosing the "bird in hand".

I think I'll wait around until there's more clarity or the discount grows (possibly after the initial payout).

Sami said...

As for why the distribution is low, you can account for repayment of credit line, contingencies and establishment of change of control trust. However on the call they said the distribution could be higher.

For the S3 filing the company when it was in restructuring in 2007, as part of the deal to convert Vickis pref shares to equity that it would file on their behalf and shoulder all legal and registration fees if it sell its unit. If you go back to prospectus filed in 2007 it details it there.

Management have enough stake to try to maximize earn outs. As a result of change of control they have some 4% plus what is owned from option vesting. I do not have the numbers with me but if I recall it is 4.5% from change of control provisions and some 3% from what they already own. So it is not chump change exactly.

However like I said this opportunity depends on the fact that they liquidate and not try to buy a different business.

segemran said...

do you know what is going to be the exact effect to sharelholders of the recent rights offering to purchase some preferred shares (with liquidation seniority)??

thanks and regards,

Anonymous said...

I'm guessing there should be no effect. Since the purchase/exercise price is set well above the maximum shareholders will receive in the liquidation, no one in their right mind would buy these pref shares. Plus they are only offered to shareholders who are not part of the group trying to increase control.

It looks to me, in my layman's review, like it's a poison pill that will have no effect unless someone seeks to buy a large stake in the company and even then the price has to run up for it to be worth it.

Sami said...

i do not see the rights plan has any affect. it may be a response to the low market price and a defense against opportunistic buyer given the expected proceeds from all the transactions.

Sami said...

also note that there are no pref shares outstanding currently and it will only be at your option to buy it, if the board does not want the new purchaser of more than 15%.

like the other comment no one will but the pref at 4 and change

Anonymous said...


is your portfolio up to date?
what is the portfolio performance?
what type of materiality does your portfolio represent?

Sami said...

i just updated the port. with the new buys, I did sell the index funds, international and emerging, and riocan.

ytd I am up 3.5%,not including dividends, which i estimate is another .5%.

Anonymous said...

thx for the update, your "since inception" performance looks good, especially considering you started when the market was still at peak.
is this your profession?
what type of materiality is this portfolio, 10k, 100k , 100mm?
can't seem to see the detail between 12.18% non-core holdings in your portfolio....

Sami said...

the good performance is due to having a lot of cash at that time and held it through he downturn.

when i began investing i was convinced of index investing so i named the portfolio that contains cash and index funds as core and the one that held individual equities as non core. that distinction is meaningless right now. the non core just means the individual names and 12.8% should be 35%.

i do not manage money professionally.

Anonymous said...


What do you think the huge volume in GLOI this week is all about? Huge transactions at $2.36.

Also, what about the involvement of Vicis, and its legal issues?

Any further insight/news on the winddown?

Sami said...

Vics is being investigated for penny stock minpulation since early in the year. If you are under the microscope you will be extra clean in your dealings.
I am not sure who is buying. but more interesting is the buyback announced today for $3 million. it is a start but my concern is the slow progress in announcing more concrete steps to return money to shareholders.