Harbinger Group: The Next Berkshire-Hathaway?

By Will Ashworth | April 17, 2011 AAA

There are many would-be contenders for the next top holdings company: Markel (NYSE: MKL), Sears Holdings (Nasdaq: SHLD), Fairfax Financial (TSE: FFH.TO), White Mountains Insurance (NYSE: WTM), Leucadia (NYSE: LUK), Brookfield Asset Management (NYSE: BAM) ... and that's just for starters. The latest candidate looking to duplicate Berkshire Hathaway's (NYSE: BRK.B) success is hedge fund operator Phil Falcone, who controls Harbinger Group (NYSE: HRG), a publicly traded holding company that's made two acquisitions in the first few months of 2011. I'll look at what makes Harbinger appealing.

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The Acquisitions
Harbinger's strategy is to buy controlling and significant equity stakes in companies competing in six industries: Consumer products, insurance and other financial products, telecommunications, agriculture, power generation and lastly, water and natural resources. In its first deal in early January, Harbinger Capital (Falcone's Hedge Fund) received 119.9 million Harbinger Group shares in exchange for its controlling 55% stake in Spectrum Brands (NYSE: SPB), whose products include Rayovac batteries, George Foreman grills, Russell Hobbs kettles, Cutter bug spray and Dingo meat and rawhide dog chew treats. Two years removed from Chapter 11, it's doing much better. In the first quarter of 2011, its revenues grew by 2.4%, which isn't a whole lot until you consider that the addition of Russell Hobbs has made it a more diversified company and that will pay dividends for years to come. In fiscal 2011, it expects to generate free cash flow of at least $155 million in 2011 and $200 million or higher in 2012. That's the first deal.

The second, announced April 6, saw it pay $350 million for UK insurance company Old Mutual's U.S. life insurance holdings. The company will operate as the Fidelity & Guaranty Life Insurance Company, the name it used prior to being purchased by Old Mutual. With 800,000 policy holders in the U.S., its main product is fixed annuities. (For related reading, see Explaining Types Of Fixed Annuities.) I hope that it can do more with the business than Old Mutual did. Acquired by Old Mutual in 2001 for $635 million it's selling the business for a little more than half what it paid 10 years ago. Either Harbinger got a good deal or Old Mutual paid a ridiculous amount of money. Time will tell. Either way, it's already acquired companies in two of six identified areas of interest. There's more to come I'm sure.

Limited Float
Harbinger Capital owns 93.9% of the 139 million shares outstanding. The float is only 10 million shares or less than 10%. This means you're at the mercy of Phil Falcone and company. That might not be a bad thing. Sure, his hedge fund has performed poorly in the last two years but he still managed a 116% return in 2007. With M&A activity picking up, it should be able to swing a few more deals to fill the arsenal. Using its stock as currency, there is the potential for serious dilution. Normally, this might be a concern, but in this instance, an all-stock deal would add valuable assets while also diversifying its investor list and improving its liquidity. I know Buffett famously regrets having bought Dexter Shoe for $433 million in Berkshire Hathaway Class A stock back in 1993 because today it's worth $3 billion and Dexter is barely relevant. I understand the sentiment. However, this is a different situation. But certainly, it's something to be aware of.

Cash
Despite just paid $350 million for Old Mutual's U.S. life insurance business, it sits with two operating companies, $121 million in cash and just $345 million in debt. It's positioned nicely to go out and make a third and fourth acquisition but there's no need to rush the process. Once you factor in its two existing businesses, you have a profitable conglomerate that can support further expansion. At this point, the what of the process is more important than the when.

Bottom Line
The value of its Spectrum Brands stock is over $800 million, which is more than the total market cap of its own stock. Once you add the life insurance business and any profits it generates as well as cash on hand, I see no reason why it's not worth more. How much more will depend on the next acquisition and the one after that. It's intriguing to say the least.

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