Background: COSN is a relic of the dot-com boom of the 90s that used to be engaged in a money losing business. Now it is just a corporate shell with $2.14 per share in cash held in money market accounts after every residual liability is paid off. The business has ceased operations, it has 0 employees, and its losses are the result of filing expenses and board meetings. Steel Partners (a hedge fund that invests in small cap, in this case nano-cap, companies) is a large shareholder and is responsible for much of the company’s actions. The company has tax loss carry forwards, which can only be used to offset profits (highly unlikely to occur in COSN’s present state with no operations and low interest rates). Steel Partners plans to use the cash on hand in order to acquire a profitable company or make investments that can make use of the tax loss carry forwards.
Opportunity: In their attempt to further consolidate Steel’s control of the company, COSN is planning a reverse 1 for 500 split. For every 500 shares an individual owns, they will receive 1 share. If a shareholder doesn’t own 500 shares, they will be bought out for $2.24/share. This has the effect of knocking out small (very small) shareholders, such as those owning 499 shares or lessIndividuals owning fewer than 500 shares (499 shares @ 1.90 – current price – or $973) will receive $2.24/share ($1117.76). While a $145 isn’t exactly a juicy nominal return, the prospect of receiving an 14.5% return on your money in less than a year is a much better alternative to the meager rates a bank is offering you right now.
While the company is offering $2.24/share, there is only a net cash position of $2.14. The reason this should pose little concern is because Steel Partners owns 47.5% and wants control of the company to exploit the NOLs. Out of 10m shares outstanding, that means just over 5m will be tendered. That requires $11.2m but is more than covered with the $21m on the balance sheet.
Risk: The reason I am comfortable recommending this is due to the limited downside risk. An economist would have you believe that you cannot pick a $20 bill off the ground, because if it were truly on the ground someone else would have picked it up already. In this instance, the amount of unencumbered cash that each share represents would take approximately 2 years to be reduced to the amount of cash that each share can be purchased at even if the tender fails. This risk is nearly eliminated now that the tender has been approved.
Disclosure: no position
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