Why Mittleman Brothers Bullish On HC2 Holdings (HCHC)

New York-based Mittleman Brothers recently released its Q2 investor letter in which the firm discussed its investment thesis on HC2 Holdings Inc (NYSE: HCHC) and other companies. We have already covered Mittleman’s viewpoint about AMC Entertainment and in this article we are going to focus on the firm’s thoughts on HC2 Holdings. Here is what Christopher Mittleman, chief investment officer and managing partner of Mittleman Brothers, said about HCHC in the letter.

HC2 Holdings (HCHC) on May 2nd announced the sale of BeneVir BioPharm, a developmental-stage biotech company focusing on oncolytic viral immunotherapy, in which HC2 held a 76% stake. HC2 paid just $8M for its stake in BeneVir, which we were using in our estimates of NAV. This transaction provided a net of $85M in cash at closing to HC2, plus additional contingent payments of up to $900M based on achievement of certain predetermined milestones. The up-front cash component alone increased HC2’s NAV by nearly $2/share (raising our estimate from $10 to $12/share), without handicapping the likelihood of the future milestone payments coming in from the acquirer, Janssen (a pharmaceutical company owned by Johnson & Johnson).

To put into perspective the full value creation that would take place in the event those milestones were achieved, $900M represents an additional $17 per share in value to HCHC holders (vs. a current price of $5.85), the receipt of which would be spread out over many years.

We believe there are additional monetization opportunities within HC2’s business mix, of similar or greater size than Benevir. Management has also expressed their intent to lower their cost of capital through a global refinancing of their $510M of 11% debt due 12/1/19, which should produce significant savings on interest expense, and possibly allow for share buybacks. We are optimistic that investors will soon begin to appreciate that the current NAV, coupled with the significant upside of many of its holdings, warrants a much higher stock price.

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New York-based HC2 Holdings Inc (NYSE: HCHC) is a holding company whose subsidiaries are focused on construction, marine services, energy, telecommunications, life sciences, broadcasting, insurance and other businesses. The company has a market cap of around $278 million. HC2’s main operating subsidiaries include DBM Global, a family of companies providing fully-integrated structural and steel construction services, and Global Marine Systems, a provider of engineering and underwater services on submarine cables.

Shares HC2 Holdings are up 3.47% since the beginning of this year. Over the past three months, the stock has moved up 2.96% while the share price has jumped 38.80% over the past 12 months.

HCHC isn’t a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the fourth quarter of 2017, there were 12 funds in our database holding shares of the company.

Disclosure: none