What’s the Deal With LGL? 

LGL is a unique situation, a US company still trading below net-net liquidation value.

LGL is a publicly traded holding company engaged in services, merchant investment and manufacturing businesses. It has sold 11 and spun off 3 businesses, culminating with the spin off of M-tron industries, inc in October 2022. As their annual report states, “our success is based on a simple formula: we seek to find undervalued companies in the Graham and Dodd tradition, a methodology for valuing companies that primarily looks for deeply distressed prices.” This maxim attracted me to look further into LGL. 

This philosophy makes sense as the company is run by Marc Gabelli son of the renowned value investor Mario Gabelli.

Their core business creates time reference standards that allow electronic devices to establish a synchronous time. This business drove profits during the dot com boom, but lately has been a marginal operating segment. Something around -1.2M in annual operating loss comes from that segment. Investment income brings in around 2M in annual profit. 

So the company appears to be a holding company similar to Berkshire Hathaway. Perhaps they bought an unprofitable core business that they will use as a holding company to buy other businesses. Overall, that seems true as since 2019 it has been building a major cash position similar to Berkshire.  

However their latest investment did not play out. They bought IronNet, a cybersecurity company, in August 2021. They sold their position in the fourth quarter of 2022, reporting a net loss of $298,000. Shortly after, IronNet went bankrupt. 

Onto the balance sheet:

Cash and cash equivalents  41,602,000

Marketable securities 16,000

Accounts receivable, net of reserves of 133,000

Inventories, net 338,000

Prepaid expenses and other current assets 185,000

Total liabilities 1,482,000

NetNet value (cash-total liabilities): 40,120,000

Shares outstanding 5,373,055 

Shares diluted (assuming warrants are fully exercised) 6,423,055

As of 11-20 the stock is trading at $6.02

From a net net calculation the stock is worth $7.47

Assuming warrants hit and dilute, that net net price would be $6.25

There are also some warrants at play:

1. Ticker Symbol: LGL.WS
2. Terms:
   • Exercise Ratio: Five (5) warrants are required to purchase one (1) share of LGL common stock.
   • Exercise Price: Initially $12.50, reduced to $4.75 post-MTron spin-off in October 2022.
3. Expiration Date: November 16, 2025.
4. Acceleration Clause:
   • If the stock’s 30-day volume-weighted average price (VWAP) reaches or exceeds $6.65 (adjusted post-spin-off), the warrants can be exercised early as “American-style” warrants.
   • Otherwise, they are “European-style,” exercisable only on the expiration date.
5. Issuance:
   • The warrants were distributed as a dividend in November 2020, with shareholders receiving one warrant per share of LGL common stock owned.
6. Dilution Potential:
   • If fully exercised, the warrants would result in approximately 1,050,000 new shares, increasing the outstanding shares by 20%.
7. Leverage and Intrinsic Value:
   • The warrants provide leveraged exposure to LGL’s stock price.
   • For example, at a stock price of $6.03 (current price): Intrinsic Value per Warrant=(Stock Price−Exercise Price)/Warrants per Share
   • Intrinsic Value per Warrant =(6.03−4.755)/5=0.256
   • Current intrinsic value is $0.256 per warrant, while they trade at $0.17

The market seems to be pricing the common shares as if they are going to be diluted by the warrants. However the warrants themselves trade at a 66% discount to current stock price. So the market seems to expect that stock price to be around LGL’s stock price at expiration will be around $5.60 (the break even price)

It seems like one could buy the warrants in this situation, but I think the:
– Price volatility

– Low Return on Present Value

– Low value (only $850,000) in warrant market now

– Low liquidity of warrants 

Introduces risk. 

If I were to invest in warrants I would also be worried about how the newfound cash would be invested by Marc considering the recent failed investment ( even though he got out early). 

The lack of insider buying especially by the Gabelli’s raises red flags. And notably, GAMCO (Mario’s fund) recently sold 10% of it’s position in LGL. 

If notable value investor insiders don’t see this as a deal it probably isn’t. 

I probably would have started a position at a better price discount on

2021-11-15 or 2022-11-14 or 2023-04-17

But I don’t have enough margin of safety to enter a position at this price.