Harbinger Group, the New York Stock Exchange-listed vehicle controlled by Falcone’s hedge fund, will get about 75 percent of a partnership it’s setting up with Exco, according to a statement today. Because the partnership will also take on debt, Exco will get $597.5 million of cash.
The acquisition would add a third leg to Harbinger Group’s operations, which already include a life insurance company and a majority stake in the maker of Rayovac batteries. Since Falcone’s hedge fund firm, Harbinger Capital Partners LLC, bought the company in 2009, it has sought to make long-term investments through the acquisition of undervalued or out-of- favor businesses.
“This deal will create long-term value by anchoring our new energy operating business with a long-duration gas asset at a time when natural gas is trading near historically low levels,” Harbinger Group (HRG) President Omar Asali said in the statement.
The Exco assets may fit the “out-of-favor” bill. Gas futures in New York have traded at less than $4 per million British thermal units this year and touched a 10-year low in April.
Most new onshore U.S. oil and gas drilling in the past decade has focused on so-called unconventional wells, many of which require techniques such as horizontal drilling and hydraulic fracturing to unlock hydrocarbons.
In contrast, the Exco assets to be contributed to the partnership include conventional wells in areas of West Texas, East Texas, and Northern Louisiana. The fields involved comprise 520 billion cubic feet equivalent of estimated proved reserves and are about 84 percent gas, according to today’s statement.
Harbinger Group expects to earn a return even if gas prices don’t recover, said a person with knowledge of the planned investment. If they decline further, Harbinger Group may seek more acquisitions as gas producers face financial distress, this person said.
Harbinger Group’s top energy investing executive is Carl Giesler, who joined from the hedge fund last year. He previously oversaw private oil and gas investments at American International Group Inc. (AIG) and was an energy banker at Morgan Stanley.
Harbinger Group Dividends
With the acquisition, dividends from all of Harbinger Group’s subsidiaries will exceed $100 million and will be greater than the company’s interest and dividend payments, according to the firm’s statement.
Exco, run by Chief Executive Officer Douglas Miller, focuses on drilling in unconventional U.S. fields, including the Haynesville, Bossier, and Marcellus shale formations. The Dallas-based company has had four straight quarterly losses driven by the decline in gas prices.
Miller said on an Oct. 30 conference call that a potential joint venture of some of the conventional fields would be used to reduce the company’s borrowing. He’s also pursuing a sale of the company’s interest in a pipeline joint venture with BG Group Plc. (BG/)
Falcone, 50, rose to prominence with a well-timed bet against subprime securities in 2007. He has since faced client withdrawals and losses, including on his funds’ investments in the LightSquared Inc. wireless network, which filed for bankruptcy in May.
Citigroup Inc. is advising Harbinger Group and Andrews Kurth LLP and Paul Weiss Rifkind Wharton & Garrison LLP are providing legal counsel. Harbinger Group rose 2.1 percent to $8.66 at 10:36 a.m. in New York. Exco advanced 4 percent to $8.61.
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