Description

Harbor Global is an interesting liquidation play. At a recent price of
$4.50, it offers downside protection as well as good upside potential.

Harbor Global is in essence the international assets of the Pioneer Group
which was recently taken over. Prior to the closing of the Pioneer deal, Harbor
Global was spun off to shareholders.

The assets of Harbor Global consist of the following:

a) real estate management and investment management operations in Russia
b) Polish and Eastern European venture capital investment and management operations
c) Polish real estate management operations
d) timber harvesting and sales in Russia
e) gold exploration operations in Russia
f) proceeds from the sale of a gold mine in Russia
g) $22.6 million in cash

As you can see from the asset list, there is political risk to the value of the
international assets (the cash is cash however).

It should be noted that according to Pioneer (in their proxy), they estimate the
appraised value of Harbor (to be recognized as a taxable distribution by
Pioneer shareholders) to be between $7.50 and $11.25. According to the proxy,
Pioneer's book value is $13.72 per share. If you add the additional $12 million
that Harbor's management thinks the Russian assets are worth above book value,
you get a book value of $15.94 per share. Using this higher book value per share,
Pioneer has used discounts of 29% to 53% to come up with the values of $7.50 to $11.25.

According to the Pioneer proxy (all Harbor Global info can be found here), the
liquidation process should take approximately 3 years. I have basically used 50%
of book value for all investments except cash. This is because the assets are
basically Eastern European and Russian from the pre-1998 era. My annual
estimate of liquidation costs is approximately $4.5 million per annum including
operating losses based on Pioneer's funding of the liquidation process and a review of
Harbor's financial statements. I have used relatively punitive assumptions, because
I am not sure that it is very feasible to make solid estimates of value in
countries where currencies may depreciate, buyers may come and go, etc.

Based on my base case assumptions, I have calculated a liquidation value of
$6.65 meaning an annualized return of 14% based on a Harbor price of $4.50.
In my calculations, I am also assuming that all distributions take place
at the end of the time period (ie. year 3). If the liquidation process
takes 5 years (downside case) and the asset values remain the same, the
liquidation proceeds drop to $4.95 meaning that essentially you don't lose
any money. However, if management can actually liquidate the Russian long-term
investments at approx $12 million above book value and the remaining assets
are still at 50% of book (the upside case), the NAV is $7.70. This represents
a return of 19% per annum.

Management has also bought shares recently.

Obviously the returns would be substantially higher if management received
book value for all assets, but this may not be possible. However, even
with some relatively tough assumptions, Pioneer is an interesting liquidation
play.

Catalyst

Value will be surfaced as asset sales are made and distributions are announced.