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