CoSineTrading at Cash; $20/Share of NOLs

I suggest investors think of CoSine Communications (COSN.PK) as a Special Purpose Acquisition Vehicle [SPAC] that is trading at cash. I have followed Cosine for years. They used to sell network equipment to the telecoms and once sported a market cap of $5B.

Today, the market cap is $25M (yes, million), which is close to its cash position of $23M. The company has only 1 employee--a CEO--and is profitable because interest income is greater than operating expenses.

Here's the reason to own the stock: The well-known activist fund, Steel Partners, together with an affiliate, own just under 50% of the shares. Their average price is roughly $2.25. Steel Partners and COSN are looking to acquire a profitable company in order to take advantage of COSN's $207M of Net Operating Loss [NOL] carry-forwards. That's $20/share in NOLs. After talking with the CEO, it's my belief that COSN will probably buy a profitable division within a much larger company. After all, Steel Partners does a lot of deals, and at some point they should be able to find the perfect company to slide into this shell. Given the valuations of SPACs pre- and post-acquisitions, I think COSN's ultimate valuation could be 2x-4x today's.

Disclosure: Author holds a long position in COSN.PK

Comments

[Irving Kau:]

Nice Article

2008 Apr 29 10:05 AM

[BradA:]

I have followed Steel Partners for a while. Cagey fellas who have made some good money this decade.

2008 Apr 29 05:49 PM

[siegfried:]

Steel Partners owns over 10% of Nathan's hot dogs, NATH, which has $33 million of net cash on its balance sheet and trades at $85 million market cap. The hot dog business yields about $6 to $7 million in free cash flow annually after deducting capex but adding back the top two exec salaries.

2008 Apr 29 05:57 PM

[User 186681:]

what happened to this company. I see it was $630 p/s in 2002, yet it reported a loss of nearly $95 million that year.

Something very fishy about the operations, any insights?

2008 May 01 02:09 PM

[zodlidd:]

Eric,

Steel Partners bought the majority of its shares back in 2004/2005 for $2.00 - $2.19 / share... who's to say they don't just vote in another one of their people during the next board meeting and wind this thing down - and pocket the $23M and their ~25% return?

2008 May 01 04:56 PM

[DeTrojjan:]

Check out KYCN for another nice work-out situation.

KYCN - controlled by Texas billionaire Harold Simmons
Brief summary:
1. steel wire business
2. came out of bankruptcy a few years ago
3. Simmons has made a ton of money investing their pension funds, and now the overfunded status is showing up on their on income statement. Some of this has declined from the fall in shares of TIE, but it is still massively overfunded, with the 2 chief investments being TIE and T. Boone's hedge fund.
4. The current PE found there is 2
5. There was recently a rights offering at $10 which upped Simmons' stake and lowered the debt
6. Icahn recently took a 5% position
7. For some crazy reason, there are no buyers for this thing. The market currently values the stock around $9.50, which gives it a PB of 0.23.
8. It is unlikely that the pension fund will be unwound any time soon, b/c leaving it alone means the gains stay tax free, but . . .

2008 May 08 03:35 PM

[Eric Appell:]

A couple of things on KYCN. The operating income was alll non-cash--it came from a pension credit. No cash involved, simply an accounting adjustment.

Also, I have a rule of thumb: never invest in companies with a net debt position. I have to follow this rule, it's kept me out of trouble for a couple of decades.

Thanks for pointing the situation out, nevertheless.


On May 08 03:35 PM DeTrojjan wrote:

> Check out KYCN for another nice work-out situation.
>
> KYCN - controlled by Texas billionaire Harold Simmons
> Brief summary:
> 1. steel wire business
> 2. came out of bankruptcy a few years ago
> 3. Simmons has made a ton of money investing their pension funds,
> and now the overfunded status is showing up on their on income statement.
> Some of this has declined from the fall in shares of TIE, but it
> is still massively overfunded, with the 2 chief investments being
> TIE and T. Boone's hedge fund.
> 4. The current PE found there is 2
> 5. There was recently a rights offering at $10 which upped Simmons'
> stake and lowered the debt
> 6. Icahn recently took a 5% position
> 7. For some crazy reason, there are no buyers for this thing. The
> market currently values the stock around $9.50, which gives it a
> PB of 0.23.
> 8. It is unlikely that the pension fund will be unwound any time
> soon, b/c leaving it alone means the gains stay tax free, but . .
> .

2008 May 09 07:04 AM

[DeTrojjan:]

There is actually no debt. There was $27M of long-term debt on the books, and the rights offering was for $25M all of which went to pay down the debt.

The large debt figure you are making reference to is probably from the deferred tax expense of running up the pension fund to such dizzying heights, which at this point is quite large.

The accounting rules for overfunded pension plans requires that they excess amount slowly be channeled through the Income Statement: 10% a year. Hence the overfunding amount is sure to distort the IS for the foreseeable future, even with TIE shares at half of where they once were, if perhaps at not quite the same rate.






On May 09 07:04 AM Eric Appell wrote:

> A couple of things on KYCN. The operating income was alll non-cash--it
> came from a pension credit. No cash involved, simply an accounting
> adjustment.
>
> Also, I have a rule of thumb: never invest in companies with a net
> debt position. I have to follow this rule, it's kept me out of trouble
> for a couple of decades.
>
> Thanks for pointing the situation out, nevertheless.

2008 May 09 10:35 AM

[DeTrojjan:]

Also, like a lot of US legacy steel companies and perhaps even more than most KYCN has been pressured by overseas competition. This is fading now that transportation costs are rising and the dollar is falling. Plus, they HAVE been running a cash positive business since leaving bk.

But still the real value lies in the pension fund. Of course, we as minority s/h have no access to determine its fate. But you should investigate Simmons' background.

He once actually self-published a hagiography in which he defends himself against prior charges of being a "corporate raider" by reconstructing himself as "defender of corporate value." Oh, the good old days before poison pills! But the bottom line is, things won't and cannot last this way for too long.

2008 May 09 10:45 AM