Liquidations are great opportunities to unlock intrinsic value. As Seth Klarman puts it in "Margin of Safety," “A liquidation… acts as a tether to reality for the stock market, forcing either undervalued or overvalued share prices to move into line with actual underlying value.” Let’s take a look at the ongoing liquidation of GlobalOptions Group (GLOI) and examine if there is value left for shareholders.
In its life as a going concern, GLOI offered risk management consulting and services for a variety of niches including disaster preparation and forensic DNA testing. In 2010 GLOI sold off its four operating business units and is in the process of returning the proceeds to shareholders.
GLOI has traded at a discount to conservative liquidation value even after announcing it planned to unwind, perhaps because much of the potential value relates to contingent earn-out payments from the business unit sales. GLOI thus far has returned capital mainly through two tender offers, which were done at a discount to my estimate of intrinsic value. That increases the value for the remaining shareholders. They bought back $2.7 million worth of stock at $2.40 a share in December, and $19.5 million at $2.60 a share in May. That leaves the stock with only about 6 million shares outstanding and a market cap of $13.4 million. The undervaluation may also be due in part to the low liquidity with the reduced float.
Walking through the remaining value:
$5.3 million in cash after completion of May tender offer$4.8 million of sale proceeds being held in escrow and assume 10% haircutTake the other assets and liabilities at book value for total remaining book value of $9.4 million[/list]
In the latest 10Q (3/31) GLOI says it expects to incur operating expenses through August 2012. All of the escrow and earn-out periods will be up by the end of 2011, so that date might be conservative. On their last conference call in November 2010, management estimated the cash burn rate for 2011 at $2-2.5 million. Taking the $2.5 million number and assuming six quarters from the last 10Q (through September 2012) yields $3.75 million in cash burn. With headquarter rent at $48,000 a quarter and salaries probably not more than $1 million a year, this appears to be a conservative number to account for all miscellaneous expenses (legal, insurance, etc.).
The key estimate of the remaining value relates to the earn-outs. There is a potential for a maximum of $19.1 million:
SafirRosetti sale- The earnout is 70% of collected accounts receivable a year from the closing in April 2010. GLOI has collected $1.1 million so far, and estimates there could be up to $500 thousand more. I will assume they get the incremental $500 thousand based on their success thus far.Bode sale – The earnout is 30% of revenues over $27 million in the year following the close with a cap of $5.5 million. Management said on the November call that Bode was on pace to do between $26-27 million in revenue in 2010. Bode has experienced strong revenue growth from the $12.2 million in sales in 2006 before being acquired by GLOI. I will assume 10% revenue growth from $26.5 million to yield $645 thousand for the earn out.Preparedness Services sale- The earnout is 40% of revenues over $15 million a year from the closing in May 2010. The Preparedness segment recorded revenues of $30.8 million, $39 million, and $39.1 million in 07, 08, and 09. It appears this segment should at least match last year’s revenues given the renewal of their contract with the state of Louisiana that provided most of their revenues, and the incremental revenue from a new agreement with BP to consult on the Gulf cleanup. Assuming $39.1 million in revenues leads to a $9.6 million earn out.[/list]These assumptions add up to $10.7 million in earn-outs.
With 6.26 million shares including options exercise, the value per share is $2.62. That is 17% upside to the current price of $2.23. But this valuation is very conservative and small swings could dramatically shift the upside. For example, if Bode can continue its 20% revenue growth and Preparedness does $5 million in incremental revenue due to the BP contract then the share value goes up to $3.07 for a 38% return. And as noted the timeline is the next 12 months or so.
Management and the board may decide to do something else with the remaining cash besides return it to shareholders, but that seems very unlikely given how far down the road they are in the liquidation process.The earnouts are contingent, and a large part of the value is tied to Preparedness performance.The company is a defendant in two lawsuits with total claims of $6.6 million. That would obviously destroy a good chunk of the value, but they do not appear to be very serious and the valuation above accounts for legal fees.[/list]
Weiss Asset Management acquired a 43% stake in the company in late 2010 but sold about 75% of their stake in the $2.60 tender offer, which makes me question the remaining value. Of course it is hard to read too much into their sale without knowing their motivations. They are still holding 21% of the shares so they should help ensure that the wind down is completed in a timely fashion.
It is hard to see how shareholders will get back less than the current share price, but I would like some more upside to a conservative scenario before buying in. I will be watching for dips below the current price.
Elie Rosenberg runs a value investing research website at valueslant.com. Sign up here to get his free value investing ideas and analysis by email and get his free ebook — 16 Ways to Find Undervalued Stocks.