HRG Group: Cheap Valuation For This Mini-Leucadia Oct. 7, :26 PM ET About: Harbinger Group Inc. (HRG), Includes: FGL, LUK, SPB

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Bryce Garrett
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1 Jonah Jones, CFA Value, deep value, growth at reasonable price, long-term horizon HRG Group: Cheap Valuation For This Mini-Leucadia Oct. 7, :26 PM ET About: Harbinger Group Inc. (HRG), Includes: FGL, LUK, SPB Summary HRG Group is a diversified holding company being overseen by the watchful eyes of Leucadia National. Fidelity Guaranty & Life is likely to be sold in the near term. The company trades at a 20%+ discount to NAV. About HRG Group: HRG Group, Inc. (NYSE:HRG) is a diversified holding company (conglomerate) that owns 57.5% of Spectrum Brands Holdings, Inc. (NYSE:SPB) and 80.7% of Fidelity Guaranty & Life (NYSE:FGL) as well as reinsurance, energy, asset management, and other businesses/investments. Spectrum Brands is a global consumer products business that sells batteries, home & garden products, pet supplies, grooming products, home improvement products, small appliances, and car care products. Brands include Rayovac, VARTA, Remington, Spectracide, Black &

Fidelity Guaranty & Life is likely to be sold in the near term. The company trades at a 20%+ discount to NAV. About HRG Group: HRG Group, Inc.

2 Decker, George Foreman, Pfister, and STP among many others. Spectrum Brands is about 65% of HRG's total asset value. Fidelity & Guaranty Life is an annuity and life insurance company which is known for its fixed annuities. It constitutes 25% of HRG's total asset value. The remaining 10% of total asset value is composed of Front Street (reinsurance company), Salus (direct originator of secured asset-based loans to middle markets), Five Island (high yield asset management firm), CorAmerica (commercial real estate lender), EIC (investment management company focused on global energy and infrastructure lending), and Compass (owner and operator of oil and natural gas assets). Risks: HRG has piled leverage on top of leverage. Their largest holding Spectrum Brands has significant leverage with over $4.3 billion of debt on a market cap of $5.7 billion, and total assets of $7.5 billion. HRG's second largest holding, Fidelity & Guaranty Life, has $1.6 billion of equity and $23.6 billion of total liabilities. Granted, Fidelity & Guaranty Life is an insurance company so you would expect a higher amount of leverage. However, on top of this HRG the parent company also holds $1.75 billion of debt on a market cap of $2.45 billion with their largest holdings being publicly traded companies that can be swayed by the whims of Mr. Market. Spectrum Brands has been highly acquisitive. In May 2015 Spectrum Brands paid $1.4 billion to buy Armored AutoGroup Parent Inc. ("AAG"), a consumer products company consisting primarily of Armor All, STP, and AC/PRO products. In January 2015, Spectrum Brands paid $148.3 million for Salix Animal Health LLC the world's leading and largest vertically integrated producer and distributor of premium, natural rawhide dog chews, treats and snacks. Spectrum Brands paid $115.7 million for Proctor & Gamble's European pet food business consisting of the IAMS and Eukanuba brands in December

The remaining 10% of total asset value is composed of Front Street (reinsurance company), Salus (direct originator of secured asset-based loans to middle markets), Five Island (high yield asset

3 2014 and $30.3 million for Tell Manufacturing, Inc. ("Tell"), a manufacturer and distributor of commercial doors, locks and hardware in October, Spectrum Brands has grown through acquisitions which increases the chances of overpaying, increasing debt levels, integration risks, and poor capital allocation. Future acquisitions may not be as successful as past ones. Not all of HRG's subsidiaries are performing well. HRG's energy segment has been negatively affected by the declines in commodity pricing. In HRG's Q quarterly report they stated that the average sales price of oil was down 45% and gas liquids were down 57% from 3Q14. Their energy holdings are now showing a negative asset value. Also, Salus has performed poorly and in April 2015 had its largest debt holding, RadioShack Corp. go bankrupt. It also lent money to Delia's which went bankrupt in December 2014 and to Frederick's of Hollywood and American Apparel which are both bankrupt now as well. These losses also hurt the results of Fidelity & Guaranty Life since Salus was managing part of Fidelity & Guaranty Life's fixed income portfolio. HRG is now focused on stabilizing Salus and managing the existing portfolio since they are no longer generating new loans. Salus's CEO left the firm and has been replaced by two executives; HRG may sell the business. Conglomerate's often trade at a discount to value. The fact that HRG is trading at a discount is not that unusual and the discount may persist for a long period of time. Investment Thesis: It is important to focus on HRG's Guiding Principles: efficient capital allocation, maintaining investment discipline, increased stream of dividends & cash flows, improving HRG credit metrics, and building long-term book value. HRG is trying to be a mini-berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) or probably more accurately a mini-leucadia National Corporation (NYSE:LUK) as its goal is to increase value through strong

Future acquisitions may not be as successful as past ones. Not all of HRG's subsidiaries are performing well. HRG's energy segment has been negatively affected by the declines in commodity pricing.

4 capital allocation. Interestingly, LUK owns 23.2% of HRG and is their largest shareholder. Although Spectrum Brands has been acquisitive they have performed exceptionally well. The company has been well managed, cut costs, integrated acquisitions effectively, and broadened its distribution network. The company has been able to create both cost and revenue synergies. This year Spectrum Brands is expecting their 6th consecutive year of record financial performance. Cash Flow from Operations (CFO) has increased from $57 million in 2010 to over $433 million in 2014 and on a per share basis CFO has increased from $1.58/share to $8.17/share over the same period. Part of this great performance may be missed by much of the market as Spectrum Brands does not screen well in earnings based screens. Earnings misstate the value of Spectrum Brands as Depreciation and Amortization is significantly higher than CAPEX. In 2014, Spectrum Brands had depreciation and amortization of $158 million which was more than double the $73 million in CAPEX. This is why cash flow generation is much greater than earnings. HRG has been looking to sell Fidelity & Guaranty Life. On October 1, 2015 Reuters announced that a Chinese company, Anbang Insurance Group Co., was currently in the lead to acquire Fidelity & Guaranty Life. At current prices HRG's stake in Fidelity & Guaranty Life is worth about $1.26 billion, but I think they are likely to negotiate a higher price. To put this into perspective the current market cap of HRG is about $2.5 billion. HRG stated in their Q quarterly presentation that any proceeds would be used de-lever or for new vertical investments. If they do use the proceeds to pay down debt, this will reduce the risk profile of HRG. Spectrum Brands is also looking to de-lever and has already reduced in excess of $450 million of debt this fiscal year. The controversial Philip Falcone (former Chairman and CEO of HRG) who was banned from the securities industry

This year Spectrum Brands is expecting their 6th consecutive year of record financial performance.

5 for five years stepped down in November He is now the Chairman, CEO, and President of HC2 Holdings, Inc. (OTCQB:HCHC). He was replaced as Chairman by Joseph Steinberg who is also the Chairman of Leucadia National which owns 23.2% of HRG. LUK has a long history and strong reputation for capital allocation. Having LUK oversee HRG is a great fit and likely to generate benefits for years to come. While HRG's energy assets are struggling and Salus is performing poorly, neither is a significant percentage of HRG's total asset value. The results of Spectrum Brands and Fidelity Guaranty & Life drive the vast amount of the companies value. Catalysts: As mentioned earlier it is likely that Fidelity Guaranty & Life will be sold. If HRG can negotiate a high price this is likely to create interest in HRG and increase their stock price in the near term. If they use the cash to pay down debt this reduces the risk profile of HRG and may increase investor valuations of the company. The other possibility is they make a large acquisition(s). If they use the capital wisely, which is what they are known for, this could add value in the eyes of investors as well. Valuation: Below is a sum-of-the-parts valuation on HRG. I think it is somewhat conservative as both HGI Energy and HGI Asset Management have negative valuations. In reality, I think both are worth something. % of Total Shares Price Value Assets 96.3 Spectrum Brands 34,240,889 8 $ 3,300,136, % Fidelity Guaranty 26.7 & Life 47,000,000 9 $ 1,259,130, % Front Street Re (Holdings) Ltd. $ 130,500, %

Having LUK oversee HRG is a great fit and likely to generate benefits for years to come.

6 HGI Energy $ (102,693,899) -2.0% HGI Funding $ 67,984, % HGI Asset Management $ (12,081,635) -0.2% Cash $ 393,700, % Total Assets $ 5,036,675, % Liabilities $ (1,838,422,150) -36.5% Net Asset Value (NAV) $ 3,198,253, % Shares Outstanding 201,360,586 NAV/Share Current Stock Price Discount 21.4% One-Year Expected Value/Share One-Year Expected Return 39.9% The current discount to the sum-of-the-parts value is 21.4%. If an investor expects Value/Share to increase by 10% over the next year this leads to a 39.9% one-year expected return assuming HRG trades at Net Asset Value. Conclusion HRG is under the watchful eye of Joseph Steinberg and Leucadia National. The Spectrum Brands business has been well managed and generates strong free cash flow. The company is likely to sell their holdings in Fidelity Guaranty & Life which could reduce the risk profile or be used to buy into other great opportunities. Finally, HRG is undervalued on a NAV basis and offers strong upside potential.

9% The current discount to the sum-of-the-parts value is 21.4%. If an investor expects Value/Share to increase by 10% over the next year this leads to a 39.

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