GCOM - Globecomm

[nnayyar]

Globecomm ($GCOM) is a name I've been looking at in the small cap space. Liquidity is thin at ADV of 75k shares. BTW, i inserted $ before the ticker in a hope it's easier to find when using the search function, a twitter innovation.

 

GCOM provides satellite-based network management solutions. Sounds pretty complicated but basically they provide the infrastructure and support to companies that require satellite or broadband access. Think the control room to those drone strikes in a military base. They also provide support for cellular and Media & Television.

Investor Presentation: http://media.corporate-ir.net/media_files/IROL/77/77373/Globecomm%20Systems%20Inc.%20Investor%20Presentation-02.07.13.ppt

 

Thesis: A number of activists have joined the name and are actively pressuring management to sell the business. These are Discovery Group fund led by Mike Murphy, SmithWood Advisors led by Jonathan Brooks and Emancipation Capital. Jonathan Brooks also heads JMB Capital and was previously the head trader at Cerberus Capital.

 

The letter from Discovery:

http://www.sec.gov/Archives/edgar/data/1031028/000118811212003031/ex1.htm

Emancipation under Item4:

http://www.sec.gov/Archives/edgar/data/1031028/000090266412001310/p12-1715sc13d.htm

 

The letter from Discovery includes some detailed valuation work on a takeout.

 

GCOM has ~70MM or $3 of cash/sh along with a Book Value of $9.60/sh. There will be approximately ~15MM more cash freed up by the end of the year from a working capital unwind at the end of a large NATO project completion.

2013 EBITDA guidance is 40-42MM or 6x EV/EBITDA.

Very little debt, 19MM.

The company has hired Needham to explore alternatives.

The current CEO is 70 years old according to Yahoo, he has stated on the recent conference call that the cash will likely be utilized for a buybacks, acquisitions, or perhaps an outright sale.

 

Negatives:

Approximately 60% of the revenues come from Government contracts with about 20% from the DoD. With the unwind of troops from Afghanistan and the problems with budget/sequestration, revs and opportunities have slowed down. However the company has been refocusing on high margin service business and there should be opportunities in the non-military sector. The company also receives about 10% from Maritime business which could also help if there is a turn in shipping volumes.

 

There is also a chance that satellite technology will be usurped by Fiber in the future but that seems far off and would be mute point if the company is sold in the next year or so.

 

Conclusion: Stock currently trading at attractive prices with potential for takeout at 25% (low end) to 50% premium. Details on valuation are in the Activist notes.

 

 

Thoughts, feedback, questions welcome!

 

 

[Chris DeMuth Jr]

The GCOM acquisition will probably achieve approximately a 60% IRR for the buyers excluding the cash flow between now and a sale.  They will probably get about $50 million in EBITDA over the next twelve months and EV of 8x = $400 million.  This deal will probably elicit some shareholder opposition.  Why was there not more interest from strategic acquirers willing to pay more?  I don’t know, but there wasn’t.  It appears as if the bankers ran a legitimate process.  There will shortly be about $100 million of cash on the balance sheet, so the price for the business is only about $250 million.  Great deal for the buyer, lousy price for the seller, but shareholders will have to be assertive in order to get any more. 

 

To be continued…