MG Capital Seeks to Oust Philip Falcone From HC2’s Board

(Bloomberg) -- Philip Falcone is in the crosshairs of an activist investor who wants to remove him -- along with the rest of the board -- from HC2 Holdings Inc.

MG Capital, run by former Third Point executive Michael Gorzynski, wrote in a letter to shareholders Tuesday that it thinks HC2 has traded at a discount of more than 80% to the value of its underlying assets because of a series of management missteps. Gorzynski pins the underperformance on Falcone, HC2’s chairman, chief executive officer and president.

MG Capital, which said it owns more than a 5% stake in the company along with its partners, has nominated a slate of six directors to replace Falcone and the rest of the board.

“We believe that HC2’s indefensible record of long-term underperformance and value destruction stems from exceptionally poor corporate governance, rampant conflicts of interest, ineffective balance sheet management, and the absence of a credible business strategy,” Gorzynski said in the letter, a copy of which was viewed by Bloomberg.

A representative for HC2 was not immediately available for comment.

Since Falcone took control of HC2 six years ago, the company has delivered “exceptionally poor” returns for shareholders, Gorzynski said, noting that total shareholder returns were negative 33% in the 12 months before MG Capital disclosed its stake, and were negative 66% and negative 72% over the past three- and five-year periods, respectively.

“As long as Mr. Falcone controls the company, we feel stockholder value remains at risk,” he wrote. “We contend that little has transpired over the past six years to suggest that he and his hand-picked directors are truly focused on stockholders’ best interests above all else.”

Gorzynski faults a “haphazard corporate strategy,” excessive debt and “unjustifiably high corporate expenses,” which he says hit about $30.8 million in 2018, among other issues in the letter. A slate of new directors would put the company on the right path, he said.

Shares in HC2 had fallen 33% in the year prior to MG Capital disclosing its stake in the company in January. Since then, HC2 agreed to sell its Global Marine Group, was in advanced talks to sell Continental Insurance and was exploring alternatives for DMB Global Inc.

HC2’s shares rose 1% to $4.06 at 9:44 a.m. in New York trading, giving the company a market value of about $187 million.

“Even if Mr. Falcone enacts some incremental enhancements designed to improve HC2’s short-term prospects, we believe any road forward proposed by him will lead off a cliff,” Gorzynski said.

Along with Gorzynski, MG Capital’s nominees include George Brokaw, Kenneth Courtis, Robin Greenwood, Liesl Hickey and Jay Newman.

Falcone, who became a billionaire after betting against the U.S. housing market, was barred from the securities industry for at least five years in 2013 as part of a settlement with U.S. regulators, who alleged that he had improperly borrowed money from his fund to pay his personal taxes and gave preferential treatment to some investors. His Harbinger Capital was once one of the biggest hedge fund firms.

As part of his 2013 settlement with regulators, Falcone had to liquidate his hedge funds under the supervision of an independent monitor. He and his firm, which had managed a peak of $26 billion in 2008, paid a $18 million fine.

He stepped down as chairman and chief executive officer of the Harbinger Group the following year.

To contact the reporter on this story: Scott Deveau in New York at sdeveau2@bloomberg.net

To contact the editors responsible for this story: Liana Baker at lbaker75@bloomberg.net, Matthew Monks

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