Saturday, April 30, 2016

Looking at "Phil Falcone’s Long Game" (HCHC)

From Barron's:

The controversial HC2 Holdings CEO is looking to repeat the success he enjoyed at HRG Group. Shares could be worth more than double.
Phil Falcone made billions for his hedge fund, Harbinger Capital, when he bet against the housing market in 2007. He is also known for his past legal troubles with the Securities and Exchange Commission, and as a large owner of troubled wireless network LightSquared, now called Ligado Networks. 

Lost in the shuffle, perhaps, is his successful deal-making record at HRG Group, a holding company that he founded, and where he took major stakes in Spectrum Brands Holdings and Fidelity & Guaranty Life. From 2011, when HRG made its first investment, through 2014, its stock returned 129%, versus the Standard & Poor’s 500 index’s 64%.

A new Falcone play is a venture called HC2 Holdings (ticker: HCHC), a company in the same cut as HRG. While small, with a market value of just $135 million, HC2’s potential could be great, if Falcone can recreate some of his past success.

Over the last two years, HC2 has bought cash-generating businesses at cheap prices, often from motivated sellers. Its holdings include Schuff Steel, a steel-fabrication company; Global Marine Systems, which installs and services undersea fiber-optic cable; a long-term care insurance business; and smaller stakes in about half a dozen or so other businesses. 

After a strong start, HC2 shares have dropped 60% since last June, along with other leveraged investment companies, which have fallen out of favor. Selling related to redemptions at some fund holders may also have played a part. At a recent $3.85, the stock looks attractive, but it isn’t without risks. 

HC2 is burning cash at the holding-company level, meaning it isn’t collecting enough dividends from its subsidiaries to cover interest and operating expenses. Still, Falcone is on the hunt for a new deal, which could push the company toward break-even. 

One holder, Chris Mittleman of Mittleman Brothers, thinks HC2 is worth more than double its current quote. He puts the net asset value at $8.30 a share. A new acquisition could bump that up. As cash flow break-even gets closer, the stock, too, will probably attract a wider group of investors....MORE