Description

Zapata Corporation (ZAP) offers the opportunity to purchase treasury bonds at a significant discount to par with a new distressed investor controlling the cash. 

• ZAP trades at a 12.5% discount to net cash and a 17.5% discount to book value
• It has no operations, $154.2mm in treasury bonds, a $9mm deferred tax asset, and a 98% ownership of Zap.com (OTCBB: ZPCM) which is a publicly traded shell of a defunct internet business
• Total liabilities are $5.2mm
• Market cap is only $131mm

 Brief Background of Zapata 

ZAP was a holding company with stakes in Omega Protein Corp and in Safety Components International. Both were sold by December 2006 and ZAP was left with a significant pile of cash. Malcolm Glazer controlled the company and in filings stated that the company was looking to invest this cash. For 2.5 years, the cash has sat in the bank and members of the Glazer family collected salaries. Earlier this week, it was announced that the Glazers had sold their majority stake to Harbinger Capital for $7.50/share. It is likely that the Glazers were forced sellers due to liquidity problems with their leveraged Manchester United investment. With control of the company, Zapata's cash will now be invested by Harbinger, which makes it more likely that there will both be an investment in the near term and that it will be accretive.

  Why Opportunity Exists 

There are a few reasons why ZAP trades at a discount to cash. Zapata has been sitting on this cash since December 2006. Investors are fatigued by quarter after quarter of no action. The Glazer family had previously made some very poor capital allocation and corporate governance decisions which Aidan819 highlighted in his Dec. 2004 write up (copied and pasted below) 

• Zapata invested millions in the failed Zap.com and Charged Productions webzines in the 1998 to 2000 period
• The Viskase (formerly Envirodyne) investment was written off in 2002
• Zapata invested in sub investment grade debt in 2000 and had to write off 13M
• Various actions which annoyed shareholders
  • Malcolm Glazer appointed 4 of his children to the board (of 8).
  • Even though he has retired as chairman, Malcolm Glazer received 1.5M p.a. as consultant up until April 2006
  • They made a lowball $28 bid to minority shareholders for ZAP in 2002. At the time it barely covered their cash alone.
  • Malcolm Glazer sold shares when there was a run up due to dot com puffery in 1998/1999 

While the departure of the Glazers should have been cheered by investors, I think people are a bit wary of Harbinger at this point in time. Having been a hedge fund darling during 2003-2007, they had a very tough 2008 when they were down ~60%. A combination of leverage and concentrated commodity investments contributed to their poor performance. Highly public mistakes such as the New York Times (NYT) investment have tainted their reputation as well. Harbinger has recently raised a new fund that will invest in distressed securities. Given Phil Falcone's background and previous success in distressed investing, it is apparent that he is returning to the style that brought him his initial success. Combined with an environment ripe with distressed properties, it is the opinion of this author that he will likely make a shrewd acquisition for Zapata.  

Summary

 An investment in Zapata is an opportunity to purchase the company at a discount to cash with an option that a very successful distressed debt investor makes an intelligent investment. The risk, of course, is that Harbinger does something foolish with the cash. The discount purchase price provides some margin of safety for any value destruction if indeed Harbinger makes a poor investment.

Catalyst

Successful distressed investment(s) by Harbinger Capital