The Company Previously Known as Imation: Glassbridge Enterprises (GLA)
I’ve been following the vicissitudes of Imation for a number of years, ever since it first showed up as a net-net on one of my screens. I have never been close to investing in it, primarily, I think, because the track record of management looked horrendous. Perhaps it was just a function of luck; by the time I became aware of the company management had established a multi-year track record of deplorable asset allocation. So I was surprised to read about their latest transformation in a recent post at Shadow Stock. Despite some misgivings about the nature of the transformation I decided it might be worthwhile to take a second look, and the Shadow Stock analysis further peaked my interest. I have to admit that the opaqueness surrounding the transformation really intrigued me. When deals are opaque, they usually are so for a reason; either the dealmakers create opaqueness to derive some benefit for themselves or the complexity of the deal, combined with reporting requirements, creates unintended opaqueness. In the former case, you want to stay as far as away as possible since the dealmakers are merely out to fleece investors. In the latter case, the opaqueness of the deal can create an opportunity for those who are inquisitive as it may induce most investors to indiscriminately sell the offending company.
So what kind of ‘deal’ is the Imation transformation? On the face of it, one might think it is the former; Clinton Group, an activist investor, has taken the lead in transforming Imation from a data storage company to an alternative asset manager. “Huh?” you may say, “What do the two have in common?” or “How is the management expertise of the former supposed to transfer to expertise in the latter?” First I should remind the reader that the so-called management expertise in the former didn’t really produce favorable results did it? So, no loss there. OK, so now the company is to be transformed into an asset manager using the leftover cash that prior management didn’t have time to dissipate to seed the new company. Next step, issue Clinton Group 12.5 million shares of Imation (renamed Glassbridge Enterprises) stock for use of its investing platform for the next 5 years. “WHAT! That’s egregious self dealing.. shareholders getting ripped off!” or so was my first thought. Furthermore as part of the transformation, the last operating business, Nexsan, was to be ‘sold’ for a $25 million promissory note and 50% of the equity in a successor operating entity; Nexsanwould be combined with a similar company owned by a private equity firm. “Huh?” my thoughts exactly. So you spin-off the only operating entity, merge it with some other operating company owned by a private (read PIRATE) equity firm and you get an IOU and some ‘equity’ in the new entity? Great deal! So far it adds up to a lot of nothing, at least superficially. Oh, I forgot to add a 1 for 10 reverse stock split just to further complicate the financials.
Then I had a think about this. Clinton Group, while being the activist on this company, wasn’t by any means the largest institutional investor; Ariel Capital Management, Wells Fargo and Renaissance were much larger investors than Clinton Group. In fact, prior to the 12.5 million share issue, Clinton Group was only a 3% owner. So why were the other ‘sophisticated’ investors letting Clinton Group up their ownership to 28% without putting up a penny and diluting the other investors by almost 1/3? Hmm.. is there something I’m missing or are the other investors just making the best of a bad situation? After all, they had all invested in Imation at much higher levels.
Just to be sure about ‘invested at higher levels’, lets take a look at the price history of Imation stock. UGH! 10 years ago Imation shares were trading at around $40. Then, over the next two years they traded down to the $8-9 range, gradually trending down over the next 8 years to around $1/share a year ago. Not particularly good for long-term investors! Today, Glassbridge Enterprises is trading around $6-$7 (after the 1:10 reverse split). This means that almost every investor, unless very recent, is sitting on a significant loss in their position. This, of course, doesn’t rule out the ‘making the best of a bad situation’ mentioned above.
How to value Glassbridge? Not so easily as it turns out, at least not until the next quarter’s financials are filed. It is not clear to me how to break out the Nexsan operating business that has now been ‘sold’ from the Imation’s last consolidated balance sheet. Nor is it clear how to evaluate some of the assets and liabilities from discontinued operations on last quarter’s balance sheet. But let me take a stab at a liquidation valuation
|Cash & marketable securities||$10.00|
|Resricted cash A/P||$2.18|
|Other Discontinued Ops||$1.15|
|Other non-current liabilities||$0.60|
|Other Discontinued Ops||$2.82|
|Nexsan Promissory Note||$5.04|
|Reduction in other liabilities (50%)||$0.95|
|Discontinued Ops (50%)||$0.84|
|subtotal before equity||$12.59|
At the end of the 3rd Quarter 2016 Imation financials showed shareholder equity of about -$3 million. I estimate that Nexsan had a maximum of about $5 million in shareholder equity, leaving the balance of the company with about an $8 million equity deficit. Pro forma, then we might expect Glassbridge to have an equity deficit of about $1.60 per share post reverse share split and Nexsan spinoff IF NOTHING ELSE HAPPENED IN THE 4TH QUARTER (which of course it did, but we’re not yet privy to this yet, so this is all a bit fictitious). Where’s the value then? It’s both in the potential balance sheet upsides listed above as well as the value of the ongoing asset management business and the equity interest in the new Nexsan. Right, the above analysis gives no value to the 50% interest in the new Nexsan entity nor does it ascribe value to what Clinton Group contributed for the 1.25 million shares it received.
Clearly from a balance sheet perspective we max out at an asset value of $10/share or so, and that’s not considering that Glassbridge will be using some of its cash to build a staff for its new asset management business. In other words don’t count on that cash being returned to shareholders or even invested in passive investments (private or public equity) for the benefit of shareholders; A liquidation valuation really isn’t of interest here as Glassbridge is set to be an ongoing business and I can see an operating cash bleed for 3-5 years depending on how long it takes the company to attract enough AUM to cover operating (read staffing) costs.
What makes this an interesting potential investment then? I think it’s because management and major institutional shareholder interests are aligned with the interests of us little shareholders. Yes, Clinton Group gets a ‘free’ equity ride for contributing its expertise; it’s a low-cost way to launch an alternative asset manager that will be valued in the stock market, but they have every incentive to make it work. After all, their name is attached to it! And to make it work they need to have some good initial investments. That’s why I think getting in early could have advantages. But it’s not to say that the share price will not go lower. Yes, I’d rather buy $10/share worth of company for $4 rather than the current $6. And the market may not recognize the potential for this asset manager until its results are proven so we do run that risk that shares could tank from here until the market sees results. That said, I do think this is an interesting investment opportunity for anyone looking at a publicly traded alternative manager (and there aren’t many out there).
Note that the above is simply my very approximate analysis of Glassbridge; asset managers are not really in my field of competence, so I would be quite happy if someone more knoweldgeable weighed in on this and pointed out where I am mistaken. Thanks!
Disclosure: I own a small position and may add to it if the share price drops further.