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Greystone $GLGI going private arb

July 03, 2013 | About:
Greystone Logistics (GLGI) is a company I’ve written about before and followed for several months. They’re also going private through a reverse split. Shareholders with less than 10000 shares will be cashed out at $0.50 per share.

There are a bunch of odd lot / reverse split “dictators” who freak out anytime I post any of these situations, so I’ve started avoiding sharing these situations. But with shares trading in the low $0.40s, there have already been a ton of write ups around the arb (including in some very public places), so I’m not exactly shining light on a completely unfollowed situation.

In fact, this post is not to advocate playing the arb, but given the now high level of publicity around the arb, it’s to discuss why I would be very, very cautious before playing the arb.

First, let’s talk about why the going private transaction makes sense. As I discussed in my previous article, Greystone definitely looks cheap, and going private will save them quite a bit of money (they estimate almost $250k per year), which against their $10-11m market cap is huge. Consider this- trailing operating income is roughly $3m. Executing this transaction will increase operating income (if their estimates of costs taken out are correct) by ~8%. That’s incredible!

So I will certainly be considering going long GLGI post transaction. The only question I have (and maybe I missed this in my first read of the proxy) is if the company will still be providing financials to shareholders.

This is a simple thing: if a company goes dark but keeps providing quarterly data (either on their website or the pinksheet website), I’m a huge fan. They save costs but shareholders can stay informed. But if they go dark and stop, or provide them at unreasonable intervals (one stock I follow provides financials ~nine months after quarter ends. Horrible!), then the going dark is much less appealing to me. It’ll be interesting to see which path GLGI plans to pursue.

So those are the positives in going long the shares today. Let’s discuss the negatives.

I think reverse split and odd lot arbs make tons of sense for closed end funds and microcaps with excessive amounts of cash compared to the reverse split. The risk with a closed end fund is almost nill: an extra arb just means they need to sell another share or two of Apple to cash everyone out. And for companies with insane amounts of cash (SODI and WELX come to mind as companies that should consider it), arbing the reverse split gives them a cost effective way to buyback shares at a discount.

But GLGI is none of those things. GLGI has a working capital deficit, only $400k in cash, and negative shareholder’s equity. While they will likely generate some cash from now until the reverse split closes, they also have about $5m in debt that’s due in March. In other words: financial flexibility here is very low.

The company budgeted ~$230k in payments to shareholders as part of the reverse split- roughly 45 shareholders. If even 25 more shareholders join the arb, that would be another $125k in payments, and (after mailing fees and everything) would take up all of the company’s cash.

So I just think the arb risks outweigh the rewards at this point.

But, if you like the business, I think the stock makes a lot of sense at these prices. The right way to play this may actually be to wait for the reverse situation resolves itself. If it gets cancelled because of too many arbs raising the cash costs too high, it would give the opportunity to buy shares from arbs forced selling on the cheap. If not, shares often drift lower right after a reverse split as liquidity dries up. Either way, patient investor may be able to get shares at a really attractive price.

Disclosure- not currently long GLGI, though I may go long in the near future

Rating: 3.0/5 (1 vote)


Jonmonsea premium member - 4 years ago
Great writeup. How do people find out about odd lot and reverse split arb opportunities? Where are they announced?

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