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ModusLink Global Solutions (MLNK) Pays Out a Special Dividend, But Gurus Had Sold Out

March 19, 2011 | About:
On March 7, ModusLink Global Solutions (MLNK) announced a special $40 million dividend to be paid to shareholders. This equated to about $0.91 per share and is payable on March 31 to shareholders of record of March 17. This is why the stock dropped by nearly 16% before the open of March 15. Since the close of March 14, the stock is now down $1.41, which has wiped out the per share dividend amount and then some. That often happens in special dividend situations like this and may be a buying opportunity even though new buyers wouldn’t be able to collect the special dividend.

ModusLink is a supply chain management service provider. The company was the subject of an activist measure last fall from hedge funds LCV Capital and Raging Capital. These activists put up three directors and urged significant stock buybacks. The company agreed to appoint one of the nominees, Jeffrey Fenton, and he was appointed in November. The company also appointed an independent director in November. This special dividend seems to be the results of these appointments.

After returning $40 million to shareholders, ModusLink has $114 million in cash and no debt. With current shares outstanding of 44 million, that still leaves them with roughly $2.50 per share of cash. Shares are currently at $5.17. Unfortunately the income statement isn’t as stellar as the balance sheet. The company lost $26.3 million last quarter, although that included a $27.2 million non-cash charge. Without the charge, operating income was $842,000. Free cash flow from operations was $9.2 million for the quarter. This was significantly lower than a year before, but they are adding cash to the balance sheet, so that’s a positive. This is a low margin business and a tough economic environment, so don’t expect significant revenue or earnings gains in the near future. However, with the excess cash and new commitment to shareholders, it could be an interesting play. Most interesting, though, is capturing back that $0.50 share price drop that was in addition to the expected $0.91 special dividend drop. I would expect that $0.50 to be made up over the next few months regardless how the stock otherwise would act.

4th quarter 2010 selling caused some gurus to miss out on the special dividend. Steven Cohen sold out of his position completely, although he only had 20,000 shares. Chuck Royce also sold out of a few shares, but is also only a very small shareholder. Same situation with Jim Simons, who owns just under 65,000 shares. Most notable was Arnold Schneider. He owns 5.6% of the company and had dumped 151,000 shares in the 4th quarter. It will be interesting to see if there is any guru interest after the stock price overreaction.

Disclosure: No Positions

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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