LGL Group: Gabelli, Rights Offering, Acquisition Proposal

LGL Group (LGL) is a micro-cap ($15MM market cap with a vintage space age logo) that makes frequency control components for the defense, aerospace and electronics industries.  Their market is mostly a commoditized industry but they've been shifting towards higher margin offerings in recent years with some success.  LGL Group has about $10MM in federal NOLs plus some other state and research credits, but this isn't a typical patent troll type NOL shell.  Mario Gabelli is a significant shareholder, not via his GAMCO mutual funds but directly in his/his family's names and his son Marc is on the board.  LGL is a very small holding in comparison to his net worth in GAMCO but like Carl Icahn's involvement similarly small companies, Gabelli has a lot of energy, loves the investment game and especially taking advantage of tax assets.  I think its clear based on the type of business this isn't a vanity project, he owns LGL to make money even if it's small in comparison to his net worth.  I've seen him speak on several occasions and he's always mentioning the tax disadvantages faced by old fashion open ended mutual funds compared to ETFs or especially real estate held for investment.  Plus he loves boring small industrial companies (where he started his career as an analyst), so his investment in LGL Group makes perfect sense.

This is another simple thesis with a near term catalyst, LGL announced a rights offering beginning on 9/5/17 to raise a little more than $11MM to pursue acquisitions, likely to monetize their NOLs without creating an "ownership change", the offering was expected to close on 10/10/17.  The rights offering was a little unconventional because it was announced at a small premium ($5.50 exercise price) to the share price at the time of the announcement and it was going to be tradeable, at a premium, what value would the rights have if you could just buy the shares directly for cheaper?  I looked at it then, as I try to look at all rights offerings, and passed.  But on 10/5, they issued a press release announcing the rights offering would be pushed back until 10/25 because they received a non-binding cash offer for their two operating businesses making the situation a lot more interesting.  Then on 10/23 they pushed the rights offering expiration back again to 11/13, likely to give both sides more time to agree on a deal?

The shares today trade for $5.66, we know that Gabelli was a buyer at the rights offering price of $5.50 as he's essentially backstopping the rights offering and along with the current CEO will have effective control of the company after the rights offering settles.  With the potential cash offer on the table, I think it significantly de-risks the situation:

• On the upside, we could either get straight taken out at a premium or receive a significant cash infusion to the holding company.
• On the downside, the two sides can't come to a deal, you still have an improving operating business, the rights offering closes and the company receives a cash infusion for additional acquisitions knowing that a proven capital allocator is effectively in control of the company.

The company has $6MM in cash and marketable securities on the balance sheet, no debt, and the operating businesses did about $1MM in EBITDA over the trailing twelve months ended 6/30 (but EBITDA for the first six months of '17 was about double '16, so there's some ramp to the business happening), putting the EV/EBITDA at approximately ~10x, not on the surface particularly cheap.  But several things strike me:

1. The investment group submitted their bid after the rights offering was announced so they must believe their offer is the superior path and has some urgency to it; 
2. Gabelli likely can't buy significant amounts of shares on the public market, either for liquidity reasons, or because he has non-public material information, but he can have the company conduct a rights offering and acquire shares that way, oversubscribe, and gain control of the company; 
3. The company is run by a 40+ year industry veteran in Michael Ferrantino, however he came to LGL in 2014 to spark a turnaround, he's 74 years old, the business trajectory is turning for the better, is now the time to cash out and retire?

It's worth noting that the company did receive a similar offer for parts of their operating business in June 2013 and turned it down, but the offer spurred strategic review that led them down their current positive path, so it's certainly possible the same thing happens again and a short term catalyst speculation turns into a longer term bet on the jockey type investment.

Disclosure: I own shares of LGL