Description

ModusLink Global Solutins (MLNK) enjoys a paltry enterprise value of ~$30 million despite:

1. TTM rev of $754MM,
2. an $800MM intact tax asset beginning to expire in 2021 (federal NOLs of $2 billion),
3. a recent $30MM investment by Steel Partners at $4 per share (doubling their stake to 27%),
4. improving results since such investment, including reaching operating income break-even excluding non-recurring costs
5. 2 new Steel board members (including a new Chairman) representing shareholder interest
6. a new CEO that co-founded a similar company purchased by Celestica 

Apparently, the low valuation was not lost on Steel Partners, who this past February doubled their position by buying 7.5 million newly-issued shares at a 47% premium to MLNK’s share price as of this writing (and a 45% premium to the then-closing market price).  

Steel’s Lichtenstein, the new MLNK chairman, wrote in his April 2013 letter to investors: 

“Our most recent acquisition, completed on March 12, 2013, is a $30 million investment in ModusLink, a company in the supply chain management and logistics business. Our goal is to fix the supply chain business and utilize ModusLink’s approximately $2.0 billion of federal net operating loss carryforwards (“NOLs”) as quickly as possible. We are looking to grow ModusLink through acquisitions. Please call us with any great ideas in this area.”  

MLNK’s recent operating income break-even (excluding non-recurring items) suggest MLNK is being fixed. 

The new CEO, John Boucher, joined MLNK in Jan 2013 after being chief commercial officer at Symbotic LLC, a global provider of integrated supply network automation solutions for warehouses and distribution centers, and managing $3.5BN in revs at Celestica.

While the new Board is not entirely new, Steel assumed two seats because of a lack of shareholder regard, as indicated in Handy & Harman’s June 2012 letter to the MLNK Board (http://www.prnewswire.com/news-releases/handy--harman-ltd-demands-immediate-board-representation-in-wake-of-accounting-fiasco-lawler-resignation-at-moduslink-global-solutions-inc-159790735.html).

If Steel cannot make the current MLNK business profitable, I believe they will sell it for $40-$50MM.

Ingram Micro (IM), a competitor, trades for ~10% of revs. At 5% of revs, MLNK’s business value is $38MM. IM’s EBIT margin of ~1.2% implies IM could earn ~$9MM pre-tax on MLNK’s revs. Assuming a 30% tax rate and 10x P/E, both near IM’s 5 year average, suggests IM may pay ~$50MM for these revs.

If Steel cannot make MLNK profitable or sell it, they will shut it down and buy a business.

How much cash would MLNK need to burn to make MLNK an unattractive investment?

Even if they burn $30MM, with only $40MM in cash, MLNK could raise $170MM in debt at ~6% to buy a low-growth business for $210. Assuming a 7x EV/EBIT multiple leads to $20MM in annual free cash flow, which the public market should value above $200MM.

So to be wrong here, the following must happen:

1. MLNK’s logistics business cannot turn profitable,
2. Steel cannot sell the logistics business for at least $40MM, and
3. MLNK’s logistics business reverts to burning over $30MM before it is shut
4. MLNK cannot buy a business with remaining cash to push MLNK share price above $3

Given the size of Steel’s MLNK investment and cost of capital, MLNK’s recent breaking-even, that such burn historically required 12 months and a new, credible CEO, my $30MM burn estimate is conservative.

Catalyst