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:
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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:
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.
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.