GlobalOptions Group common (GLOI): 15% long position at $2.30
I’m going to discuss the liquidation of a tiny ($32 million market cap) holding company named GlobalOptions Group. What the company does isn’t that important anymore since all of its operations are being sold off, but for the purpose of exposition here is a brief rundown:
1. The Preparedness Services unit offers a full range of services to help clients better prepare for, respond to and recover from disasters.
2. The Fraud and SIU Services unit provides investigative surveillance, anti-fraud solutions and business intelligence services to the insurance industry, law firms and multinational organizations.
3. The Security Consulting and Investigations unit (a.k.a. Bode) delivers specialized security and investigative services, such as security assessments, threat analyses and forensic DNA analysis and casework, to governments, corporations and individuals.
Each of these divisions has been arranged to be sold for the following consideration:
1. For Preparedness Services: (i) approximately $10 million in cash, of which $1 million will be held in escrow for 12 months following the closing; (ii) an earnout payment equal to 40% of any revenues of Preparedness Services (subject to certain minimal exclusions) over $15 million during the 12-month period following closing, which payment may not exceed $12 million; and (iii) the assumption of certain of Preparedness Services’ liabilities.
2. For Fraud and SIU Services: (i) $8,250,000 in cash, of which $825,000 is to be held in escrow for 15 months following the closing and (ii) the assumption of substantially all of the liabilities of FSIU.
3. For Bode: (i) $24,500,000 in cash, of which $2,450,000 is to be held in escrow until December 31, 2011, and (ii) an earnout payment equal to 30% of any revenues over $27,000,000 earned by Bode during the 12-month period following the closing of the Bode Transaction, which payment may not exceed $5,500,000.
The first of these transactions officially closed after receiving shareholder approval on July 16, 2010. I expect that the company will soon schedule a special shareholder meeting to approve the sale of the remaining two divisions. The probability of approval is virtually 100%, as per this excerpt from the Preparedness Services asset sale plan:
“In connection with our entry into the Asset Purchase Agreement, Dr. Schiller, Mr. Nyweide, Harvey Partners, LLC, Cipher 06, L.L.C., Vicis Capital LLC and Howard Safir entered into support agreements relating to an aggregate of approximately 43.2% of our common stock outstanding, pursuant to which they agreed to vote their shares in favor of the Asset Sale.”
When GlobalOptions files a proxy for the next special shareholder meeting, I expect to see the same language repeated.
So now let us begin to examine what shareholders will receive in GlobalOptions’s liquidation.
Total upfront cash consideration adds up to $42.75 million.
Total revenue-contingent cash consideration adds up to $17.5 million. Judging by revenue measures over the past few years, GlobalOptions is very likely to realize a substantial portion of the revenue-contingent component of the consideration–let’s say 70%, or $12.5 million. We should further discount this because the payment will not take place until late 2011.
Tax consequences of the first transaction (which I expect to be similar to the remaining transactions) are explained thus:
“The Asset Sale will be a taxable event to us for U.S. federal income tax purposes. However, we expect, subject to the completion and outcome of certain tax analysis and studies currently in process, that the Asset Sale will not result in any material adverse U.S. federal income tax consequences to us or to our stockholders. The Asset Sale may result in our being subject to state or local sales, use or other taxes in jurisdictions in which we file tax returns or have assets.”
Miscellaneous expenses (contingent and otherwise) are explained thus:
“If and when the Asset Sale is completed, we will deposit approximately $1,860,000 and $780,000 in ‘rabbi trusts’ established for the benefit of Dr. Schiller and Mr. Nyweide, respectively, which amounts will be paid six months after the recipient’s separation from service to the Company for any reason. Pursuant to his employment agreement, Mr. Nyweide will also receive a performance bonus of $150,000 in connection with the completion of the Asset Sale.
“In addition, Purchaser has agreed to pay Sellers at closing the amount by which the working capital of FSIU at closing exceeds $1,985,080, and Sellers have agreed to pay Purchaser at closing the amount by which the working capital of FSIU at closing is less than $1,985,080.”
I haven’t done due diligence on the working capital position of each GlobalOptions subsidiary, and therefore I can’t quantify this contingent expense. We’ll have to depend on a margin of safety here until new information arises.
Taking all of these factors into account, I believe that $50 million is a conservative estimate of liquidation value. At a current market cap of $32 million, there appears to be a giant margin of safety.
Management intends to distribute the net proceeds from all three sales to shareholders:
“On May 13, 2010, in connection with our announcement of our entry into the Asset Purchase Agreement our Chairman and Chief Executive Officer stated that, subject to our satisfaction of and compliance with existing contractual and banking obligations, we intend to return the net proceeds from the Asset Sale and the sale of our SafirRosetti business unit (which was completed on April 30, 2010) to our stockholders. That continues to be our intention, but we have not made a final decision as to, and continue to explore the most efficient form of, any such distribution.”
I expect GlobalOptions to begin its liquidation process soon, and to finish it in late 2011.
Why does this opportunity exist?
First of all the liquidation is quite complex for most market participants to interpret. There is also the added bonus of forced selling by Vicis Capital, a hedge fund in the process of liquidating itself and an owner of 2.8 million GLOI shares. (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aG0s0wa_2z1o) I haven’t corroborated my hunch by talking to Vicis management, but I think they will have to wind down before late 2011. Buying shares in GLOI amounts to time arbitrage.
any concern to insiders selling in the last few days. CEO sold around 1/3 of his holding so did the CFO.
I see that Dr. Schiller and Mr. Nyweide sold some of their shares non-open market on July 16–the day of Fraud SIU’s sale closing–which I don’t view as an issue. Where do you see that they sold out in the last few days? If an insider sells after Thursday’s news, I would be wary.
I am referring to those sales, I meant the filing was made in the last few days. You would think that Thursdays news was in the making before July 16. A sale like that would have few weeks of due diligence and legal negotiation.
I’m going to find out what the deal is with those two sales. They seem to have coincided with the Fraud SIU sale and may have been part of the plan. I’ll try to read the filings again.
If I were an insider and knew about the sale of Bode I would have waited for the news to hit before selling anything. That’s why I might be wary of sales that happen over the next few months, though insiders may be selling for any number of reasons.
I bot this at $1.30 and am gone. Management is so shady and bad. How do you know they are going to liquidate and not just buy out Vicis’ stake screwing all the other shareholders.
When management talks about pursuing strategic alternatives, I am skeptical. When they actually close on the sale of two out of three of their businesses, and then find a buyer for the third, it boosts their credibility. If management buys out the stake of one shareholder at the expense of all the others, this is a clear violation of fiduciary duty. I believe that GlobalOptions will announce special dividends before the end of the year and gradually liquidate until 2012. The risk now is that LSR backs out of the Bode purchase.
Thanks for bring the idea, I am trying to vet it with you as well. I have a question that you may help me with: did you factor the credit line and burn rate over the 12 months to get the company liquidated?
I figure the credit line is the holding company obligation and will not be assumed by the buyers, just looking at their statements, the line of credit is secured by the subsidiaries but held at the holding company. and if you consider some burn rate over the next few quarters of $1 per quarter, given their recent financials, so that is going to be reduced by 2-3. Also there is “change of control” clauses in some of the employment agreements of the executives I have not gotten an exact number but I estimate some 2-3 million.
So that will leave us with 40 to market cap of 34.
Am I off base with these deductions?
This is an interesting idea. Thanks.
Sami how do you figure cash burn? As far as I could tell they do not break out hold co overhead. But I would also assume at least 2 million over the next year or so. Also are you adding “change of control severence” on top of the rabbi trusts? I thought the trusts were the cash payment in that case. I agree with you that it looks like they will need to pay off the credit line.
In terms of the working capital contingencies from the close notes it looks like they actually got paid a bit for excess WC in the FSIU acquisition. It is guesswork as they break out segment assets but not liabilities, but judging from that and relative revenue size looks like those contingencies are not too concerning.
I am getting around 44 mil. liquidation value. Not sure if that would leave enough margin of safety at today’s close around 35 mil market cap.
Latest 10Q shows line of credit at $4.1mm offset by cash of $2.7mm. So, figure ~$2.0mm to extinguish the line of credit? My assumption is they would do that once the cash from the Witt or Fraud/SIU transactions closed. Burn rate should be minimal since all employees have been moved out with the respective companies. Most of the balance sheet is receivables and goodwill, so it should be a straightforward process if you factor the recv.
Even if there are aspects that drag out, I would imagine there could be an initial distribution of most of the cash fairly early on once a decision is made. So, $52mm – $2.0 in comp – $2.0 in credit line – $2.0 in liquidation costs? $46mm value sounds reasonable to me.
Well, last quarter’s results were very good… net loss was $1.7 million (excluding non-recurring charges) vs. $2.4 million. LSR can’t back out of the deal claiming a material adverse change. That makes the Bode sale more certain.
yes the results were good. the Q&A even eluded to 49m for distribution in total by end of 2011 after burn rate and contingencies so this looks good.
all sales are management lead buyouts, so management know that there is good potential to grow revenue. the sponsors of these buyout bought large stakes in the company. why would they buy of liquidating company unless they know they will get their money back. I assume they bought in to ensure the vote.
however, I do not understand the sell off today? may be because on the call they did not commit to how they are going to distribute the proceed or because the headline loss? any ideas?
In the first paragraph of my post I said that it’s not too important what the company does. I should definitely rewrite this, since such a large amount of the liquidation value will come from revenue contingencies. In the Q&A, management hinted that they don’t expect to realize much of the revenue contingency from Bode (capped at $5.5 million). To get an idea of the earnout from Preparedness Services, I looked at the most recent 10-K and found this:
“Preparedness Services revenues were $39,003 for the year ended December 31, 2009, as compared to $39,117 for the year ended December 31, 2008, representing a decrease of $114 or less than 1%. The State of Louisiana, which retained JLWA to manage the state’s relief program related to Hurricanes Katrina, Rita, and Gustav, represented $24,478 of revenues for the year ended December 31, 2009, as compared to $26,647 of revenues for the year ended December 31, 2008.”
I see revenues of $30.8 million, $39.1 million and $39 million for 2007, 2008 and 2009, respectively. If this performance continues in 2011, the company will receive about $9.6 million from the Preparedness Services earnout. The Louisiana contract will be renewed beginning September, but how will the revenue stream compare to previous years?
I like what the facts indicate and believe that there is a good enough margin of safety. I like how management said that a burn rate assumption of $5 million over the course of a year is “high.” They didn’t clarify much on this though. Liquidation value is probably $41 million ($2.85 per share) on the low end vs. current market cap of $32 million.
Now it’s going to be a time arbitrage.
I am somewhat concerned that in the call management left open the possibility of continuing as a going concern and said they would hold back from distribution reserves for ongoing operating costs. That could really be anything they feel like. The CEO and CFO don’t have a very big stake here so seems they aren’t so incentivized to fully liquidate. On the other hand, why go through all the trouble of selling off the units if full liquidation wasn’t the direction they want to go in?
Also, any idea what the S-3 for Vicis Capital was about?
The poison pill today gave me a little bit of comfort that the original plan is on track. I also don’t like that they left open the possibility to retain the cash and do something else with it but they have also repeatedly stated publicly that they intend to fully distribute the proceeds and have nothing else in the works for the cash. It seems that would open them up to potential shareholder lawsuits if they started going down another path.
I get about $34m on the low end (no contingencies and only half of the escrowed amounts are paid out) and almost $55m on the high end. Conservative expectation is $42m on 15.5m shares fully diluted. Since most of the cash ($23-25m or about $1.65/share) will be paid out in the next 60 days, the risk is the $0.40 stub with an upside on that of about $1.90.
I’m new to GLOI but I like the risk reward. Based on last qtr financials and conf call it seems much of the uncertainty is clearing:
8.0 mm working capital 9/30 (excluding discontinued ops)
minus 2.5 mm burn rate (CFO answer to direct question on the call)
plus 2.4 mm escrow
plus 24.5 mm Bode cash plus escrow
plus 9 mm Witt contingency (may get the full 12 given announcements that Witt signed on with BP)
plus 2 mm Bode contingency (assumes 20% growth rate continues into 2010/2011)
Totals 43.4 vs. 33.6 current Market value
My realistic minimum is 40 and max is about 46
Anyone still in this?
After the tender my guess is $19 mm distribution over 6.2 mm shares or a little over $3 per share. This assumes Witt Associates does same revenue as last year, the lawsuits are nuisance and will be dismissed, and $1 mm burn rate for 6 quarters. Light trading today at $2.40ish.
@BLinvestor – I’m still in this one. My calculations came in right on the money with yours and had the same assumptions. Liquidity’s probably going to be much lower going forward now that it’s not on the NASDAQ.
Good luck!
Anybody talk to mgmt recently? Sounds like a final distribution won’t be made before July, 2012 and cash burn through then will be ~$3.5mm. Just curious if this is well known or not.
Just got in this at 2.30. I have a net working capital (including cash and escrow) after the tender of around 10m, 3.5m burned until liquidation for 6.5m before earnouts. 9.6m earnout from Preparedness (assuming similar revenues to 2009-39m) and 1.96m earnout from Bode (assuming same as 2009 revenues of 33.4m) takes us to working capital+earnouts of 18.06m, or 2.92 per share. Is my Bode number too optimistic?
A return of around 30%, not correlated to the market, hopefully (some of which) occuring in early 2012 doesn’t sound too bad.
Thoughts on the tender results, anyone? I was looking to the insiders as a signal to what would be left over – hoping that low participation would signal their confidence in optimistic earnouts and a valuable stub. It seems most directors tendered most shares. Interestingly, the CFO and CEO did not tender the majority of their shares – according to recent forms 4. Are there still employee stock options outstanding that they need to get the price over?