Harbinger leaps ahead on cell call

Mon Jun 1, 2009


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By Pete Gallo

Two basic truisms about recessions are that regular folks pinch pennies and newspapers tank. Of course, the daily ebb and flow of economic news can produce winning investment opportunities. Just ask the investment team over at Harbinger Capital Partners, headed by Philip Falcone.

One of Harbinger's biggest portfolio holdings, bargain-cell-service provider Leap Wireless, based in San Diego, is turning out to be a major beneficiary of the current recessionary retrenchment by cash- and credit-strapped consumers.

A long-term call by Harbinger and held in its portfolio since 2007, Leap is phoning in some strong results - adding half a million subscribers so far this year, bringing its base to four million monthly subscribers. News of big subscriber gains announced in May sent the stock 10% higher in a single day.

Since the start of the year, Leap Wireless shares have risen from $25.26 to $39.70, as of May 19. About $10 of that gain came in a single month, roughly from mid-April through the middle of May.

Harbinger, whose offshore fund was up 0.72% through April, is Leap's biggest shareholder. It owns some 6.8 million shares - about a 9.7% stake, according to regulatory filings with the Securities and Exchange Commission. (Jeff Altman's New York-based hedge fund, Owl Creek Asset Management, is also a major shareholder, based on SEC filings.)

The surge to $39.70 per share boosted the value of Harbinger's stake to roughly $270 million, for a gain of $98 million.

That's a pretty remarkable result given the backdrop of recession and concerns that the wider wireless sector is showing signs of maturing, with the industry as a whole adding just one million new monthly customers in the first quarter - its weakest showing since 2006.

Bad economic times are usually a harbinger of industry consolidation. And Leap has been a perennial target for a buyout. Since Harbinger first started buying Leap stock, the wireless company has been touted as a potential acquisition for the other low-cost wireless provider, MetroPCS Communications.

Although analysts have long suggested a courtship between the two, no buyout deal for Leap has ever materialized. But none of this has dampened the wild speculation. A May 19 Wall Street Journal Online article renewed the theme by suggesting that telecom giant AT&T was the next potential buyer for Leap. If true, that would help explain $3 gain in less than a week by the stock.

Even if the buyout rumors remain just that for the moment, it's hard to imagine that big carriers facing a slower-growing industry will long be able to resist targeting Leap. If they don't, Leap's low-cost model will eventually clobber them as its market share swells.

Either scenario is good for Harbinger. One has to admire Falcone and his team for recognizing the value and growth proposition and laying down major chips on Leap two years ago. The bet is already paying off in a big way, and it will be interesting to see if the activist hedge fund adds more shares to its Leap stake now that the San Diego-based company has demonstrated its ability to sail on recessionary market water.

More worrisome and daring, surely as far as investors are concerned, is Harbinger's big stake in the New York Times. As most of you know, Harbinger owns a massive holding in the Gray Lady - some 28 million shares, or a 19.9% stake, based on SEC filings.

But even as the debt-laden New York Times continued to struggle in May, trying to forge a plan to save its Boston Globe paper, Harbinger's basic thesis - that even in worsening economic times, media ego would drive interest in saving the landmark paper - is proving true.

Aside from investment from Mexican billionaire Carlos Slim, May media headlines focused on potential buyers for the New York Times, including record mogul David Geffen. Reports claim that Geffen approached Harbinger and other big investors. Though no deal with Geffen or anyone else has materialized as yet, potential buyers would have little choice but to play ball with Harbinger, the company's largest shareholder.

Interestingly, the stock hasn't done terribly considering the challenges facing the wider newspaper industry and its technologically outmoded revenue models. Since the start of March, the share price has climbed from about $2 to $6.55 as of May 19.

Still, $6.55 is well below the $26 per share New York Times was trading at in 2007, when Harbinger started buying the stock.

ISSN: 2151-1845 / CDC10004H