LEUCADIA NATIONAL CORP LUK
February 18, 2013 - 1:56am EST by
scrooge833
2013 2014
Price: 27.00 EPS $0.00 $0.00
Shares Out. (in M): 378 P/E 0.0x 0.0x
Market Cap (in $M): 10,206 P/FCF 0.0x 0.0x
Net Debt (in $M): -1,500 EBIT 0 0
TEV ($): 8,706 TEV/EBIT 0.0x 0.0x

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  • Holding Company
  • Investment Bank

Description

Leucadia is well known among members of VIC.  Due to uncertainty around a recent announced merger plus a spin-off of its wine assets, the stock has become cheap.  
 
In Nov 2012, Leucadia announced a merger with Jefferies Group.  Leucadia plans to swap 0.81 of its shares for each Jefferies share.  Leucadia plans to spin off its California wine business, with a book value of $197 million, or 81 cents a share, to its holders before the deal closes. 

 With the memory of the near-death of Jefferies (due to the collapse of MF Global) still very recent in their minds, Leucadia shareholders initially reacted negatively to the news. Leucadia's stock price dropped to 20 and change, even when the book value per share of the post-merger will be 24.69.  Recently, the stock has come back to 27.
 
Post-merger,  Leucadia will be in the business of merchant investing and owning Jefferies, an investment banking firm.  Jefferies wil continue its over 50-year focus in the capital markets and maintain a highly liquid balance sheet.  Future acquisitions and investments will leverage the knowledge base, opportunity flow and execution capabilities of Leucadia and Jefferies' management team and businesses.  Management will consist of:  Richard Handler, Jefferies’ CEO, and Brian Friedman, Executive Committee Chairman, will serve as Leucadia’s new CEO and President, respectively, while continuing as hands-on leaders of Jefferies. Joe Steinberg, Leucadia’s current President, will serve as Chairman of the Board of Leucadia. Leucadia’s senior operating team, including Justin Wheeler, Chief Operating Officer, Tom Mara, Executive Vice President and Joe Orlando, Chief Financial Officer, will remain in their roles and manage Leucadia’s existing assets under the leadership of the new CEO and President from Jefferies. Ian Cumming will be retiring (he is 71). 
 

LOGO


 

The non-Jeffereies assets of post-merger Leucadia are the following:  

National Beef
-4th largest beef processor in the US, with significant operations in hide tanning, direct-to-consumer beef sales, retail package preparation and logistics
-Major exporter to foreign markets, including Asia and the Middle East

Inmet Mining (Publicly listed – TSX: IMN)
-Global exploration, development and mining of base and precious metals. Copper mine development currently underway in Panama

Premier Entertainment (Hard Rock Hotel & Casino Biloxi)
-325 room hotel with 50,000 square feet of gaming
-Currently constructing a 154-room tower addition to hotel

Berkadia
-One of the largest non-bank owned commercial mortgage servicing and origination platforms
-50/50 joint venture with Berkshire Hathaway

Garcadia
-Acquires and operates auto dealerships, with current operations in lowa, Texas and California
-Joint venture with Garff Enterprises

Conwed
-Market leader in lightweight oriented and extruded plastic netting
-Partners with customers to customize core technology into innovative solutions

Linkem
-Start-up wireless broadband services provider in Italy

Idaho Timber
-Wood product manufacture and distribution
-Operations in primary milling, clear boards and dimensional lumber remanufacturing

HomeFed
-Developer of residential real estate projects

 

Leucadia's CAGR Growth in Book Value Highlights

 

 

From Leucadia’s 2011 Annual Report:  
 

Leucadia National Scorecard

 
       
 
 
 
Book
Value
Per
Share
  
  
  
  
   
 
 
 
Book
Value
%
Change
  
  
  
  
   
 
 
 
% Change in
S&P 500 with
Dividends
Included
  
  
  
  
   
 
 
 
Market
Price
Per
Share
  
  
  
  
   
 
 
Market
Price
% Change
  
  
  
   
 
Shareholders’
Equity
  
  
   
 
Net Income
(Loss)
  
  
   
 
 
 
 
Return on
Average
Share-
holders’
Equity
  
  
  
  
  
  (Dollars in thousands, except per share amounts)   
  1978   ($ 0.04     NA        NA      $ 0.01        NA      ($ 7,657   ($ 2,225     NA   
  1979     0.11        NM        18.2     0.07        600.0     22,945        19,058        249.3
  1980     0.12        9.1     32.3     0.05        (28.6 %)      24,917        1,879        7.9
  1981     0.14        16.7     (5.0 %)      0.11        120.0     23,997        7,519        30.7
  1982     0.36        157.1     21.4     0.19        72.7     61,178        36,866        86.6
  1983     0.43        19.4     22.4     0.28        47.4     73,498        18,009        26.7
  1984     0.74        72.1     6.1     0.46        64.3     126,097        60,891        61.0
  1985     0.83        12.2     31.6     0.56        21.7     151,033        23,503        17.0
  1986     1.27        53.0     18.6     0.82        46.4     214,587        78,151        42.7
  1987     1.12        (11.8 %)      5.1     0.47        (42.7 %)      180,408        (18,144     (9.2 %) 
  1988     1.28        14.3     16.6     0.70        48.9     206,912        21,333        11.0
  1989     1.64        28.1     31.7     1.04        48.6     257,735        64,311        27.7
  1990     1.97        20.1     (3.1 %)      1.10        5.8     268,567        47,340        18.0
  1991     2.65        34.5     30.5     1.79        62.7     365,495        94,830        29.9
  1992     3.69        39.2     7.6     3.83        114.0     618,161        130,607        26.6
  1993     5.43        47.2     10.1     3.97        3.7     907,856        245,454        32.2
  1994     5.24        (3.5 %)      1.3     4.31        8.6     881,815        70,836        7.9
  1995     6.16        17.6     37.6     4.84        12.3     1,111,491        107,503        10.8
  1996     6.17        0.2     23.0     5.18        7.0     1,118,107        48,677        4.4
  1997     9.73        57.7     33.4     6.68        29.0     1,863,531        661,815        44.4
  1998     9.97        2.5     28.6     6.10        (8.7 %)      1,853,159        54,343        2.9
  1999     6.59 (b)      (33.9 %)      21.0     7.71        26.4     1,121,988 (b)      215,042        14.5
  2000     7.26        10.2     (9.1 %)      11.81        53.2     1,204,241        116,008        10.0
  2001     7.21        (0.7 %)      (11.9 %)      9.62        (18.5 %)      1,195,453        (7,508     (0.6 %) 
  2002     8.58        19.0     (22.1 %)      12.44        29.3     1,534,525        161,623        11.8
  2003     10.05        17.1     28.7     15.37        23.6     2,134,161        97,054        5.3
  2004     10.50        4.5     10.9     23.16        50.7     2,258,653        145,500        6.6
  2005     16.95 (c)      61.4     4.9     23.73        2.5     3,661,914 (c)      1,636,041        55.3
  2006     18.00        6.2     15.8     28.20        18.8     3,893,275        189,399        5.0
  2007     25.03 (d)      39.1     5.5     47.10        67.0     5,570,492 (d)      484,294        10.2
  2008     11.22 (e)      (55.2 %)      (37.0 %)      19.80        (58.0 %)      2,676,797 (e)      (2,535,425     (61.5 %) 
  2009     17.93        59.8     26.5     23.79        20.2     4,361,647        550,280        15.6
  2010     28.53 (f)      59.1     15.1     29.18        22.7     6,956,758 (f)      1,939,312        34.3
  2011     25.24        (11.5 %)      2.1     22.74        (22.1 %)      6,174,396        25,231        0.4
  CAGR                                                                
  (1978-2011)(a)                     11.1     26.4                                
  CAGR                                                                
  (1979-2011)(a)     18.5             10.9     19.8             19.1                

 




The following chart shows Jefferies' business:

LOGO

 

Jefferies' business consists of:

-Investment Banking (40%)
-Equities (21%)
-Fixed Income (38%)

Jefferies' recent Income Statement

                 
Financial Summary              

($ Millions)

   Fiscal Year
2011
     Nine Months
2012
 

Equities

   $ 594       $ 466   

Fixed Income

     715         897   
    

 

 

    

 

 

 

Sales & Trading

     1,309         1,363   

Other

     74         13   

Equity

     187         141   

Debt

     385         310   
    

 

 

    

 

 

 

Capital Markets

     572         451   

Advisory

     550         392   
    

 

 

    

 

 

 

Investment Banking

     1,123         843   

Asset Management Fees and Investment Income

     44         11   
    

 

 

    

 

 

 

Net Revenues

   $ 2,549       $ 2,230   

Adjusted Net Revenues (1)

     2,476         2,220   

Adjusted Operating Earnings (1)

     366         395   

Adjusted Net Income (1)

   $ 232       $ 221   


With the exception the global financial crisis in 2007-2008, Jefferies has not had a single loss quarter dating back to 1990.
 
Jefferies 10 year highlights:


INCOME STATEMENT: 10-YEAR SUMMARY
DATESALESEBITDEPRECIATIONTOTAL NET
INCOME
EPSTAX RATE
(%)
11/12 3.87 Bil 491.80 Mil 52.80 Mil 282.41 Mil 1.22 34.30
11/11 3.53 Bil 419.33 Mil 45.10 Mil 284.62 Mil 1.28 31.70
11/10 2.80 Bil 396.67 Mil 36.00 Mil 223.67 Mil 1.09 39.40
12/09 2.63 Bil 507.75 Mil 39.80 Mil 275.28 Mil 1.35 38.60
12/08 1.67 Bil -888.16 Mil 29.30 Mil -540.92 Mil -3.30 0.00
12/07 2.72 Bil 245.73 Mil 27.00 Mil 144.67 Mil 0.92 37.90
12/06 1.96 Bil 348.65 Mil 18.90 Mil 204.14 Mil 1.41 39.40
12/05 1.50 Bil 268.41 Mil 15.56 Mil 157.44 Mil 1.16 38.80
12/04 1.20 Bil 226.99 Mil 13.78 Mil 131.37 Mil 1.03 37.00
12/03 926.72 Mil 144.53 Mil 14.75 Mil 84.05 Mil 0.71 36.60
 

 

WHY THE DEAL IS BENEFICIAL 

Before, I delve into the price and valuation, I will first explain why the outlook of this deal is net-net positive. For Leucadia, it solves a leadership-succession issue because the the current duo that have led Leucadia since the 1970s, Joe Steinberg and Ian Cumming, are 68 and 71, respectively whereas Richart Handler is only 51. The deal gives Jefferies access to a strong liquid balance sheet outside its own. Leucadia also benefits because it's buying a profitable firm and thus should be better able to make use of $1.4 billion of deferred tax assets that might otherwise have to be written off. Leucadia's current businesses don't generate a lot of profits, netting about $100 million in the first nine months of 2012 (Cumming and Steinberg is more interested in increasing book value than in reported profits).  The combined companies will have $9.3 billion in book value. Leucadia has a liquid balance sheet with cash and public securities of $2.4 billion, offset by $960 million of debt.  Leucadia presumably will continue to make investments and buy businesses. Handler's stake of $235 million dollars in Jefferies will be converted to Leucadia stock and should put himself aligned with Leucadia shareholders going forward. Leucadia will leverage Jefferies' 700 investment bankers across 8 industry verticals in offices worldwide, as well as Jefferies' research and trading platforms.  As a subsidiary of Leucadia, Jefferies will have greater balance sheet resilience and flexibility to guard against, and take advantage of, market dislocations and other opportunities especially during this time when competitors confront regulatory, operational and market pressures. The current chairman will retire in mid-2015, handing the reins to the Jefferies CEO; this leaves the company with well-regarded management and a stable of well-financed businesses with mostly high return on capital. With an expanded capital base and an enhanced earnings base, Leucadia could experience better growth in its book value in the coming years, providing attractive returns to investors.  Examples of opportunistic intermediate term (six months to two+ years) marketable securities investments emanating from Jefferies’ trading flow and market knowledge in the past include the recent investment in Knight Capital. 

 

 

WHY EXECUTION RISK IS MUTED

Jefferies and Leucadia’s relationship has been built over twenty years.  Leucadia owned 28% of the firm prior to the merger deal and held about half of one of Jefferies' best businesses, its junk-bond trading desk. It's rare for a Street firm to take a partner for a trading operation. Jefferies and Leucadia have worked together and partnered on countless financings and strategic transactions, including Jefferies High Yield Funds (2000 – 2007), Jefferies High Yield Holdings joint venture (2007 – ongoing) and the Fortescue investment (2006 – 2012).  Furthermore, Rich Handler will continue to own over $230 Million worth of stock in Leucadia.  This will align him, Cumming, Steinberg with the shareholders. 

LOGO


Valuatio

Leucadia is paying less than book value for Jefferies.  At $27, Leucadia is now trading at less than 1.1 times the book value of the post-merger.  Included in this market cap is a stake in the wine assets, that will be spun-off to shareholders.  The wine asset is carried in the balance sheet at $197 million.   Leucadia has never traded this cheaply to its book value in many years. In fact, the stock is down sharply,  from its 2007 peak of $56, as the price/book multiple has collapsed. I actually estimate that because of access to Leucadia's capital and Leucadia's NOLs, Jefferies should be able to help the combined company compound book value faster than its CAGR rates in the past 10 years.  Once the recent memory of MF Global becomes more distant in the past, a company that can compound at 15% starts getting revalued with a higher price-to-book multiple by the market. Suppose you use $27 per share as cost and we use 13% as the CAGR for the company for the next 5 years, and the company gets valued at 2 times book at any one point in time for the next 5 years, then you are looking at a CAGR return in the stock price that is in the 27% range.  Now if you value the wine asset at a midpoint between different methods of valuation, you can easily take another $1 per share in your cost basis in the stock. This means your cost basis is $26 and not $27. Suppose you use $27 per share as cost and we use 13% as the CAGR for the company for the next 5 years, and the company gets valued at 2 times book at any one point in time for the next 5 years, then you are looking at a CAGR return in the stock price that is in the 29% range.  

I end this report with a little discussion on the wine assets (Crimson Wine Group) that are being spun-off and how I arrived at around $1 of value ($1.17 to be exact) for each Leucadia share. 

Crimson Wine Group, due to list 2/26, owns high-end wine brands (e.g. Pine Ridge) that sell for $15 to $100; 180 acres of prime Napa vineyards (Stag’s Leap, Rutherford,
Carneros); and about 900 acres elsewhere. Each Leucadia share will receive 0.10 share of Crimson Wine Group.  The firm has struggled since consumer luxury demand collapsed in 2008, but it treated falling land prices (35% in Napa, more elsewhere) as a chance to increase acreage, harvest and case production by 70%, 120% and 150%, respectively. Crimson earned just 2% on equity in 2011, and not much more in 2012 -- but Leucadia reports the firm has only now reached efficient scale, and will henceforth be more sustainably profitable, subject to the usual uncertainty of an agricultural firm. More speculatively, Crimson would benefit from consumer recovery and a falling dollar (exportable product with few foreign inputs). Crimson controls approximately 1,166 acres of vineyards and approximately 706 acres are planted (newly planted vines take approximately 4 to 5 years to reach maturity).  The company bought Seghesio Family Vineyards in 2011 and Chamisal Vineyards in 2008. The company paid around $105 million that is equivalent to $4.30 per Crimson Wine share versus the current total book value at $8.10 (as a reference the company recently sold a non-strategic vineyard for approximately 1.8x book value).  If you take the price/book of comparables like Constellation,  Willamette Valley adn Treasury Wine Estates (traded in Australia), you can arrive at $11.70 per share in value for Crimson.  That equates to about $1.17 per Leucadia share in Crimson Wine Group. 

 

 

 

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Just cheap as investors have a near-term memory of the negative events that surrounded Jefferies Group, the company that is becoming a subsidiary of Leucadia.  The pending spin-off of Crimson Wine Group will give investors an opportunity to pick up Leucadia at a further discount. 
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