Tuesday, November 23, 2010

Harbinger Group: Cash At A Discount

Harbinger Group (HRG) is a holding company that hasn't held much of anything other than cash for the last several years. As such, it mostly traded at a market cap commensurate with its cash holdings. But that changed in the last couple months as the stock price dove, creating a potential opportunity for value investors.

HRG has agreed to issue new shares in return for a majority stake in another public company called Spectrum Brands (SPB). The opportunity arises because HRG's price does not appear to properly reflect its ownership in Spectrum Brands.

After the deal (which is scheduled to close this quarter), HRG will have less than 140 million shares outstanding. At its current price, that would give it a market cap of about $630 million. But it will own 27.8 million shares of Spectrum, which is worth $734 million at its current price of $26.40 per share. In addition to its future holdings of Spectrum, HRG currently has $140 million of cash and short-term investments, versus just $10 million worth of liabilities. This suggests that the market is valuing the $730+ million of Spectrum at just $490 million.

However, this does not necessarily mean that investors should jump onto HRG on the expectation that its price will appreciate. It could very well be that the divergent valuations of these two companies will converge as a result of a fall in Spectrum Brands' stock, rather than a rise in the price of HRG. As a result, one potential opportunity for investors who expect a price convergence would be to go long HRG while simultaneously shorting Spectrum. This would provide a profit for the investor as long as the prices of these companies converge, no matter whether HRG appreciates, Spectrum declines, or some combination of the two.

But there are risks even with this long/short strategy, as HRG is not done investing just yet. The company just issued $350 million worth of debt, as it continues to seek acquisitions. From the last quarterly report:

"The Company intends to use the net proceeds from the offering for general corporate purposes, which may include acquisitions and other investments...We intend to make investments in businesses that we consider to be undervalued and have potential for growth."

Whether these additional investments will add or subtract value is subject to uncertainty, which is further compounded by the use of a fair amount of leverage in the form of the company's newly issued 10%+ senior notes. More on this potential investment is available here.

Disclosure: None

1 comment:

Lew said...


Based on the article you linked to it seems that buying this stock you are essentially making a long bet on the hedge fund Harbinger Capital Partners.