Harbinger Group: Compelling Value with Catalyst

Thesis

Harbinger Group has net current asset value of $6.96 per share, compared to the current share price of $6.49 and tangible book value of $7.43 per share. An investment in Harbinger is an opportunity to purchase the shares at a discount to cash with the possibility that a very successful investor will make an intelligent acquisition. When an acquisition is announced, the shares should trade up to at least tangible book value.

Background/History

Harbinger Group, formerly known as Zapata Corporation, is a holding company which has approximately $149 million in cash, cash equivalents and investments as of March 31, including 98% of Zap.Com. Zap.Com is a public shell company which does not have any existing business operations.

Zapata was controlled by Malcolm Glazer, who beginning in 2006, stated in SEC filings that the company was looking to invest the proceeds from the sale of stakes in Omega Protein Corp and in Safety Components International. For 2 ½ half years, the cash pile sat in the bank while the Glazer family collected salaries. On July 9, 2009, the Glazers sold their majority stake in Zapata to Harbinger Capital Partners for $7.50 per share. Following the sale, the company was renamed Harbinger Group.

Harbinger Capital Partners

At this time, many investors are wary of Harbinger Capital Partners. The firm was founded in 2001 by Philip Falcone with $25 million under management. The firm became a hedge fund darling and in 2007, multiple Harbinger funds rose more than 100% as a result of bets against the mortgage market and positions in commodity producers. In fact, assets under management peaked more than $18 billion. However, 2008 contrasted sharply with the firm’s prior success. During 2008, Harbinger funds lost about 60% as a result of leverage and concentrated positions in commodity companies. Due to the illiquidity of some of Harbinger’s positions, the firm limited redemptions.

Following this setback, Harbinger has looked to focus more on its core competency: distressed securities. Philip Falcone began his career in 1985 at Kidder, Peabody & Co, where he was a member of their junk bond desk. Following this, he spent time in the junk bonds departments at Wachovia and Barclays before founding Harbinger Capital Partners. As a result, the firm has the expertise to generate superior returns in the current distressed asset cycle.

Timing of Acquisition

Since Harbinger Capital acquired control of the company, general and administrative expenses have risen substantially. While some of these expenses have resulted for the relocation of he company’s headquarters to New York City, they also reflect an increase in fees associated with advisers. This demonstrates that Harbinger Capital is serious about making an acquisition, rather than just letting the cash earn paltry interest in U.S. Treasuries and money market accounts.

Downside

The two big risks here are the possibility that Harbinger either (1) continues to not make an acquisition for an extended period of time or (2) makes a foolish acquisition. The discount to net cash provides a margin of safety for an investor at the current price.

Why Is the Company Mis-Priced?

Harbinger Group is mis-priced for two reasons. First, the shares are illiquid and trade an average of only approximately 20,000 shares each day. Secondly, investors fear that this may be a 'dead money' investment, as it was while the Glazers let the proceeds from asset sales sit in the bank and collected salaries.

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