The Next Berkshire Hathaway?
When exceptional investors and/or business operators take control of otherwise unremarkable public corporations, it's often a prelude to a lucrative transformation of which outside investors can also take advantage, if they happen to notice what's going on before Wall Street wakes upto metamorphosis in progress.
As someone who has been writing about Harbinger Group (HRG) since it was a shell company with a pile of cash that exceeded its market cap (see post: How to buy $148.7 million in cash for $123.4 million, http://caps.fool.com/Blogs/how-to-buy-1487-million-in/397384 ) I was very interested when I came across a new write-up on the stock today. In a recently published letter about HRG, titled "The Next Berkshire Hathaway? The Brains, Capital, and Deal Flow of a Billionaire Investor at a 38% Discount to NAV" Christopher Mittleman, the CIO of a small New York money management firm, compares Harbinger's Philip Falcone to Warren Buffett. He even goes as far as to compare HRG to an early Berkshire Hathaway.
Mittleman argues that HRG's main investment, a significant stake in Spectrum Brands (SPB) is “absurdly undervalued” for its portfolio of brands, including Rayovac batteries, Remington grooming products and Cutter pest controls.
Of course, Mittleman is talking his book, his firm currently owns approximately 1.7 million shares, around 1.2%, of HRG. Still, his argument that investing in HRG and Falcone today is similar to investing in Icahn Enterprises (IEP) and Carl Ichan at the low point of his reputation back in 1996 is an interesting one.
Here's Mittleman's attempt to value HRG on a sum-of-the-parts basis:
"HRG has 139.202 million shares outstanding. Its stake in Spectrum Brands, valued at SPB's last trade of $22.96, is worth $637 million or $4.58 per HRG share. HRG also owns a recently acquired 3.7 million share stake in Canadian firm North American Energy Partners Inc. (NOA CNC$5.12), worth $19 million today or $0.14 per HRG share. There is also about $70 million of cashworth $0.50 per HRG share. That totals $5.22 per share in NAV, only 16.5% higher than the current stock price...
Another source of upside potential comes from HRG's recent $350 million acquisition of a life insurance company from Old Mutual PLC called Old Mutual U.S. Life Holdings, Inc., which has now been renamed Fidelity & Guaranty Life (FGL)...they state the current equity value of that acquisition is now $625 million, which adds $1.98 per HRG share in incremental NAV net of the $350 million associated debt. That mark-up could be conservative because FGL's subsidiaries had statutory capital of $941 million as of 07/03/11, with net income of $39 million in Q2 2011 alone (excluding investment trading gains). And they control a massive float ($17 billion in assetsunder management). If Falcone can improve the investment returns on that float, even slightly, it could result in huge returns on the capital invested to acquire that business. HRG also createda reinsurance subsidiary to hold and invest reinsurance reserves on the life-insurance policiesand annuities of FGL, another chunk of float for Falcone to invest. So FGL may really be worth around $700 million (74% of statutory capital), and that $75 million in incremental value above current book value would add another $0.54 per HRG share to NAV."
At the very least, the letter is an interesting read. I am still long HRG here in CAPS. I have not yet established a real-life position, but I am thinking about it again after reading this compelling piece.
The Case for Harbinger Group as the Next Berkshire