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How to buy $148.7 million in cash for $123.4 million

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May 26, 2010 – Comments (6) | RELATED TICKERS: HRG

 

Here's an interesting "blank check" company that I came across today that is trading at a 17% discount to the total cash, cash equivalents, and investments that it has on the books (none of the money is in equities).

The company is called Harbinger Group Inc. (HRG).  As of May 5th of this year it had $148.7 million in cash and a market cap of only $123.4 million.  Harbenger is basically a shell company that has money and is looking for a place to invest it.  OK technically something called Zap.Com Corporation is the shell company, but HRG owns 98% of that so it's basically the same thing.  

HRG is so unfollowed and unloved that CAPS doesn't even list the right name for it.  CAPS still lists this company's name as Zapata Corp., but it officially renamed itself Harbinger Group a while ago.

Harbinger has been sitting on this wad of cash for quite some time, December 2006 to be exact.  At that time it sold its 57% ownership interest in common stock of Omega Protein Corporation, which CAPS mistakenly states that it still owns.

Confusing huh?  The short story is that one can buy HRG at a 17% discount to the cash on its books. The all important question is...what will Harbinger do with this cash, how long will it wait to do it, and how quickly is is burning through its cash.

One has to have a tremendous amount of faith in the management of a company to assume that they will spend their money wisely in this sort of situation.  So who is managing Harbinger?  One might automatically assume that this sort of company is being run by some pump and dump scheister or penny stock scammer.  That is absolutely not the case.  Controlling interest in Harbinger (51.6% to be exact) was purchased in July 2009, by a group of funds run by Harbinger Capital Partners.  That's the private investment firm aka hedge fund run by the famous investor Philip Falcone.

So we know that someone smart is supposedly pulling the strings here.  The next question is how quickly is HRG burning through its cash?  The company spent nearly nothing in 2008, but it spent $13.3 million on "professional fees associated with advisors retained to assist us in evaluating business acquisition opportunities" (this money probably went straight to the hedge fund or its friends) in 2009 and $2.7 million during Q1 2010 ($10.8 million annual rate).  HRG's current market cap is $25.3 million less than the cash that is has on the books, so it can tread water for approximately two years before the discount that we are being given on its assets today completely disappears.  

Will HRG actually purchase something of value over the next two years?  I certainly have no idea, but given the pedigree of the company's controlling shareholder and the nice discount I have decided to take a leap of faith and add Harbinger to my CAPS portfolio today at $6.40/share. Having said this, I definitely am way too conservative to purchase this company in real life.

Is anyone out there familiar with this situation?  If not, then does anyone have any stories about investing in similar blank check companies and how it turned out?  I'd love to hear your thoughts.

Deej

6 Comments – Post Your Own

#1) On May 26, 2010 at 7:48 PM, finabuddy (96.44) wrote:

Well using dated sources makes it confusing...but the only confusing part i see is that fact you insist on calling this a blank check company. This typically means a SPAC..which this doesnt appear to be. Or am I wrong?

 You are buying shares in a company that owns treasuries. But your risk isnt the same as treasuries, because this doesnt appear to be a SPAC. If it is not a SPAC, they dont have to send the money back after a predetermined time frame. You have a company that could keep sitting on their hands with the added risk if they actually buy something. Why wouldnt you just buy treasuries? At least then the return would be that of treasuries, no risk of a business purchase, and your returns wouldnt be dictated by the demand of shares for HRG.Or better yet, buy a stock that is an actual operating company. Then you at least know what business you are buying. 

 

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#2) On May 27, 2010 at 6:42 AM, TMFDeej (99.40) wrote:

Finabuddy.  Semantics aside, the advantage of this situation to treasuries is:

A) You're buying its assets at a 17% discount.  Uncle Sam doesn't let you do that with direct Treasury purchases.

B) One of the best performing hedge fund managers of the past decade is supposedly going to eventually do something with this money.

You're absolutely right there is a lot of uncertainty surrounding HRG, hence the discount.  A number of newsletters and advisors have made a ton of money for their clients in the past by investing in similar situations...shell companies trading at a discount to assets that are run by well-respected investors. 

I completely understand if this situation is not for you.  I am not putting real money in this idea yet either, but I am adding it to my CAPS portfolio because I think that it has the potential to be a good investment and because I want to follow it and learn what happens.

Deej 

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#3) On May 27, 2010 at 8:40 AM, Peshorper (62.60) wrote:

Pure conjecture on my part but I think with the moves I am seeing here, they look like they are creating public version of their hedge fund. 

They bought out an existing public company, divested all major assets and renamed it after their fund. They are also in the process of moving HQ to NYC, where Harbinger Cap Partners is already.  I could imagine that the next steps would be a secondary offering and/or private placement to raise capital (which would dilute existing shareholders).

Then they can begin the process of investing in distressed companies or whatever the company's real purpose will be. I don't think the $150m is there for investment operations, as I don't think there are too many major distressed assets that can be acquired by such a low sum. 

So, I don't think there will be much chance for profit on the cash position as I think it will be used for the capital raising process to come.

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#4) On May 27, 2010 at 1:21 PM, finabuddy (96.44) wrote:

It wasnt semantics, it effects the investment. In a SPAC you get your money back after time if no investment is made or you can sell the shares. In this case you can only sell the shares. Im not argueing over words, but a concept.

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#5) On May 27, 2010 at 3:41 PM, TMFDeej (99.40) wrote:

I never implied that one would get their money back after a specific period of time when investing in this company.  On the contrary, I wondered how long one would have to hold on before Harbinger actually did something.

Finabuddy, you are the only person who called HRC a SPAC.  I never mentioned the term once.  I called it a "blank check" company and a shell company.  Here are the definitions of these terms according to Investopedia:

"blank check" company: "A company in a developmental stage that either doesn't have an established business plan or has a business plan that revolves around a merger or acquisition with another firm."  (link)

"shell company": "A corporation without active business operations or significant assets."  

These are very accurate descriptions of what HRC is.  The terms do not imply that Harbinger is a SPAC.  You put words in my mouth and then chastised me for using them.

Deej 

 

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#6) On September 23, 2010 at 3:48 PM, IlluminatInvest (70.96) wrote:

Any thoughts now that they've done the stock swap with Spectrum? 

"Harbinger Capital will give about 27.8 million shares of Spectrum to Harbinger Group, a holding company that seeks out investment opportunities through acquisitions, in exchange for approximately 119.9 million newly issued shares of Harbinger Group stock."

 Even if you're not thrilled about Spectrum Brands' prospects, at these prices it's an arbitrage situation since Harbinger is getting around $720M worth of Spectrum for only $650M of newly issued Harbinger stock.

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