market folly

Philip Falcone: Slow Moving Activism in the UK

This is yet another edition of our extended hedge fund portfolio tracking series where we are now tracking UK positions. Coinciding with another update later this morning, we're today focused on the holdings of Harbinger Capital Partners. Philip Falcone’s hedge fund has had two activist positions in UK companies for quite some time, owning Tate and Lyle as well as Inmarsat. In both cases, Harbinger’s efforts to unlock value are ongoing and are probably progressing more slowly than they would like. Both cases demonstrate that contrary to popular opinion, hedge fund activism often does not produce a quick buck. Instead, it often takes time and patience before paying off, as hedge fund activists either enter the position with a long-term focus or acquire one once assessing the situation.

Harbinger Capital Partners is an activist hedge fund that was founded in 2001 by Philip Falcone. Harbinger’s website says their strategy is to seek alpha-generating ideas that are uncorrelated to investment cycles. Harbinger looks for investments that fall into four categories:

1. Event – investments in companies where the Harbinger team identifies a significant opportunity to actively engage with a company to unlock value (activism).

2. Distressed/Bankruptcy – investments in companies that are already in default, in bankruptcy, or in some other stage of financial failure or distress.

3. Value – passive investments in securities where Harbinger believes a positive catalyst for value realization is already present.

4. Corporate Shorts – passive investments where Harbinger views the security to be overvalued or believes weakening fundamental trends or identifiable negative catalysts are apparent.

While Harbinger deals in equity markets, Falcone's roots are in distressed investing and he is opening a new fund to return to these roots. His investment style focuses on bankruptcies, proxy fights, and intensive credit research. We've been tracking their US equity positions for quite some time now and you can see their latest movements in this regard here. Additionally, we've just today updated some of their portfolio holdings too.

Now, let’s take a look at their UK holdings. Tate & Lyle is a manufacturer of food ingredients that are mainly made from corn and sugar cane.

The table below shows that Harbinger started accumulating shares of Tate and Lyle as long ago as January 2008. It is believed that Harbinger are seeking to push for a link with Bunge, a US food group in which Harbinger also has an interest. In June 2008, Bunge agreed a $4.8bn takeover of Corn Products International, the US corn sweeteners group. That fueled speculation that Bunge might be interested in buying Tate as well as it has a large corn-based food ingredients business in the US.

During 2008, Tate and Lyle’s then CEO, Iain Feguson, met with Philip Falcone several times and also talked with him on the phone fairly regularly. Ferguson has said that Falcone’s investment in Tate lies behind his habit of focusing on scarce assets that are hard to replicate. Ferguson noted that in the case of Tate & Lyle, the scarce assets are the US plants - including the new Fort Dodge plant in Iowa which is the first corn wet mill built for 12 years - and the company's access to valuable slots on the US rail system.

As we have reported before, after an extremely successful 2007 in which they shorted subprime mortgage debt, Harbinger had a bad 2008 and were, like many hedge funds, inundated with redemption requests. Harbinger appear to have been forced to reduce some holdings, including the Tate and Lyle stake. The table shows that from a high of a 19% ownership stake in July 2008, Harbinger reduced their holding down to a 13% stake in March 2009, where it still stands today. Despite some press speculation that Harbinger would sell out of Tate and Lyle altogether, they appear for the time being to be continuing their efforts to bring Bunge and Tate & Lyle together. From the outside at least, not a lot appears to have changed since March of this year. The CEO, Iain Freguson, is in the process of being replaced by Javed Ahmed. It's difficult to attribute this management shift to Harbinger as one of Tate & Lyle’s other large shareholders, Invesco, has been campaigning for a change at the top for sometime.

Secondly, let's turn our focus to Harbinger's position in Immarsat:

Inmarsat was founded in1979 to ensure that ships could stay in contact by telephone. In 1999, they became the first intergovernmental organization to be transformed into a private company and in 2005 they were floated on the London Stock Exchange. Inmarsat offer a Broadband Global Area Network (BGAN) service that enables, among other things, TV broadcasters to beam breaking news live via videophone. In future they hope to offer a new service allowing mobile phone calls or text messages from aircraft transmitted via Inmarsat satellites to the ground.

Harbinger, in partnership with SkyTerra Communications (a US satellite company that they have a 48.5% stake in) has been interested in Inmarsat for some time. It is thought that Harbinger are looking to merge the spectrum holdings - the radio bands used for mobile communications - of Inmarsat and SkyTerra. SkyTerra has said that the spectrum owned by Inmarsat could be used by SkyTerra to provide "ubiquitous wireless coverage" in the US and Canada. Inmarsat’s view is that it is confident of its stand-alone prospects, but it intends to maintain a constructive relationship with Harbinger and SkyTerra.

Harbinger has not made a formal offer for Inmarsat because it needs to gain regulatory clearance for a deal first. Their intentions became clearer in July 2008 when the board of SkyTerra and Harbinger announced that they were seeking to make an offer to acquire the entire issued share capital of Inmarsat. Harbinger has given a so-called "reference price" for the possible bid of 535p, although it has stressed that this does not constitute a conditional bid price.

The approval process for the Inmarsat Change of Control Application is ongoing. Harbinger's expectations remain as stated in the July 2008 announcement and they think that approval is likely to take approximately 12-18 months from the date of that announcement. The regulatory process requires:

• approval from the U.S. Federal Communications Commission (FCC) for the transfer of control of the FCC licences held by subsidiaries of Inmarsat
• FCC approval for the transfer of control of the FCC licences held by SkyTerra Subsidiary LLC, an indirect subsidiary of SkyTerra
• approval under the FCC's foreign ownership limits for Harbinger to own up to 100% of SkyTerra.

So it looks to definitely be an ongoing situation that we'll keep track of as it unfolds. In addition to the two activist holdings, Harbinger also has what appears to be a passive, value orientated stake in Northern Petroleum.

Taken from Google Finance - Northern Petroleum Plc is an oil and gas production, development, exploration and asset trading company focused on areas in Europe. The Company is recognized as an Operator of both onshore and offshore projects. Its activity is mainly carried out in The Netherlands, Italy, United Kingdom and Guyane.

This is a part of our continued expansion of our hedge fund portfolio tracking series. For a brief primer on tracking positions that various funds hold in UK markets, head to our article here. For further coverage of UK positions that prominent hedge funds hold, make sure to check out our following coverage: Coatue Management's UK holdings, as well as Moore Capital Management's positions, Stephen Mandel's Lone Pine Capital UK holdings (and their recent movements as well), Sprott Asset Management's defensive UK portfolio, as well as Citadel's positions. Check back daily as we continue to cover some of the most prominent hedge funds in the game.