JEF - Jefferies Group

[tombgrt]

Agree. The only sad thing is that they already had $1b in cash & equiv. What will they do with this new cash? Pile it up? Could they find a decent acquisition? Special dividend?

[bookie71]

When you are uneasy with your partner, cut your loses and go on to the next opportunity.

In the past, if the opportunities weren't there, they paid out a large special dividend.

[Parsad]

Agree. The only sad thing is that they already had $1b in cash & equiv. What will they do with this new cash? Pile it up? Could they find a decent acquisition? Special dividend?

 

Cash is never a bad situation, as long as you just don't sit on it for years.  They will find a use for it when others need it most.  LUK is the 2nd largest position in our funds after BAC.  Cheers!

[mhdousa]

Agree. The only sad thing is that they already had $1b in cash & equiv. What will they do with this new cash? Pile it up? Could they find a decent acquisition? Special dividend?

 

Cash is never a bad situation, as long as you just don't sit on it for years.  They will find a use for it when others need it most.  LUK is the 2nd largest position in our funds after BAC.  Cheers!

 

Sanjeev, I thought you had concerns about the lack of successors who could emulate the C&S way.  How did you get comfortable?

 

[mankap]

They will soon find use of cash.Jefferies open lots of doors for them.

I understand that JEF brought Fortescue opportunity to LUK.

[FrankArabia]

Jef is still a second tier investment bank...still don't see a reason why they would ever take a huge stake in this mediocre franchise

[berkshiremystery]

Agree. The only sad thing is that they already had $1b in cash & equiv. What will they do with this new cash? Pile it up? Could they find a decent acquisition? Special dividend?

 

Cash is never a bad situation, as long as you just don't sit on it for years.  They will find a use for it when others need it most.  LUK is the 2nd largest position in our funds after BAC.  Cheers!

 

On pure valuation LUK seems more compelling than BRK currently,... and therefore I own it.

[FrankArabia]

I don't think its even fair to compare this to BRK. from what I can see so far, LUK has a bunch of sub par businesses while BRK is backed by some of the world's best. Of course there is going to be a valuation gap but the question is why isn't it bigger?

[berkshiremystery]

I don't think its even fair to compare this to BRK. from what I can see so far, LUK has a bunch of sub par businesses while BRK is backed by some of the world's best. Of course there is going to be a valuation gap but the question is why isn't it bigger?

 

Yup, you are probably right,... but for me it's only the size of the equity base,... simply Darwinian,... who can compound money easier in the next decade, some big $177b King Kong or some smaller $6b turtle ---> Mohnish's thesis. If you would force me to choose at a water pistol gun point,... and threaten me to make me wet,... where I had to choose between these two,... who would more likely outperform over one decade,... BRK vs LUK,... I would purely bet on LUK.

[ShahKhezri]

With the recent transaction, I'm also thinking of switching from L position to LUK.  L's way of finding investments is to reinvest money through sharebuybacks...LUK has a history of making these transaction's and now they have "fortress LUK" to do it with.  Further, this move would diversify since almost 60% of my portfolio is FFH/MKL/Y from CNA.

[FrankArabia]

I looked at Lowes myself. Looks like a bunch of sub par businesses lumped together. Can't see how they're going to be generating great returns in the years to come aside from the share buybacks. I do own one of their subsidiaries Diamond though but I think that is a weak link that needs to be sold.

[giofranchi]

The Brooklyn Investor on Leucadia FMG Note Resolution:

 

http://brooklyninvestor.blogspot.it/2012/09/leucadia-fmg-note-resolution.html

 

Personally, I feel safer now that LUK is out of it.

 

giofranchi

[Parsad]

Agree. The only sad thing is that they already had $1b in cash & equiv. What will they do with this new cash? Pile it up? Could they find a decent acquisition? Special dividend?

 

Cash is never a bad situation, as long as you just don't sit on it for years.  They will find a use for it when others need it most.  LUK is the 2nd largest position in our funds after BAC.  Cheers!

 

 

Sanjeev, I thought you had concerns about the lack of successors who could emulate the C&S way.  How did you get comfortable?

 

I became more comfortable with Justin Wheeler after I found out he was the one behind the National Beef acquisition.  I think he would do fine looking for ideas for LUK if something happened to Steinberg & Cummings.  Cheers!

[tombgrt]

That's what I already said here before Parsad! ;D I don't think we should underestimate the power of combining a talented guy with the support and training given by Steinberg and Cummings. He'll get plenty of preparation before they leave him all alone. Hell, it could take another 5 years or who knows, even longer... And it's likely that they will stay somewhat involved behind the scenes.

 

I doubt he'll be anywhere as good as Steinberg and Cummings, but I'm confident that he'll do at least decent and work in shareholders' interests.

 

Compared to BRK, LUK is small and flexible. They don't need to install a buyback system, invest in capital intensive businesses to secure certain cash flows, sell put options on the markets that expire years from now, ... to secure the future in some way. If they want to continue this great story, the most important thing is training Wheeler to be the best he can be.

 

 

[berkshiremystery]

That's what I already said here before Parsad! ;D I don't think we should underestimate the power of combining a talented guy with the support and training given by Steinberg and Cummings. He'll get plenty of preparation before they leave him all alone. Hell, it could take another 5 years or who knows, even longer... And it's likely that they will stay somewhat involved behind the scenes.

 

I doubt he'll be anywhere as good as Steinberg and Cummings, but I'm confident that he'll do at least decent and work in shareholders' interests.

 

Compared to BRK, LUK is small and flexible. They don't need to install a buyback system, invest in capital intensive businesses to secure certain cash flows, sell put options on the markets that expire years from now, ... to secure the future in some way. If they want to continue this great story, the most important thing is training Wheeler to be the best he can be.

 

The LUK hamster wheel has a great chance to move for another decade forward,... only with an exchange of hamsters,... and some newly trained champion hamster in it  ;)    ....

[giofranchi]

If they want to continue this great story, the most important thing is training Wheeler to be the best he can be.

 

Well, Mr. Wheeler has already been working with Mr. Steinberg and Mr. Cummings for many years. If he weren't good, why should Mr. Steinberg and Mr. Cummings have given him ever increasing authority and responsabilities? If Mr. Steinberg and Mr. Cummings like Mr. Wheeler, I like him too! And I do not really think he needs much more training!

 

giofranchi

[Sportgamma]

Regarding Wheeler:

 

Kiltacular made some interesting notes on Wheeler further up in this thread: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/luk-leucadia/80/

 

I liked Wheeler quite a bit in the small group.  Not a promotional type at all.  At one point, someone asked him in this small group how it felt to be the center of attention now?  He actually sort of blushed.  Hard to describe but he gave the right feeling and said that he wasn't there yet but that he enjoys his role, etc.  He's from a small town and seems to combine a small town attitude with a good bit of worldly insight in business. 

 

He was well versed in all the businesses and said something like "We looked at 3,000 ideas last year".  I think I sort of blurted out something like "Jesus!"  (Please don't let that start another thread on religion !!).  Anyway, he said: "Most go right into the trash."  I liked his response -- he was sort of saying: "Oopps...I didn't mean to make it sound like I was bragging".

 

Still, it was interesting and I got the feeling he's looking at all of them with the team and that they're giving him some serious experience.  I also realized that sellers / promoters (whatever) are bringing Leucadia tons of stuff to look at -- that can't be a bad thing. 

 

Overall, I would say that at this point, I think Wheeler is very good based on these impressions.  Obviously, we can't know for sure until much later.  But, given that Cummings isn't going anywhere for three years and I think / got the feeling that at this point Steinberg will stay longer, they seem to be setting things up very intelligently.

 

We now have the experience of the AmeriCredit investment and the acquisition of National Beef. I also think that he must have been involved with the resolution of the FMG note.

 

We know that the AmeriCredit deal was a very shrewd investment, made alongside Berkowitz and similar in rationale to Buffett´s Clayton Homes investment:

 

Indeed, their investment in AmeriCredit has many similarities to Buffett’s acquisition of a manufactured housing company called Clayton Homes in 2003, which Buffett discussed at length in this year’s annual letter to the shareholders of Berkshire Hathaway. It would be instructive to discuss Buffett’s acquisition of Clayton Homes to understand the opportunity Fairholme and Leucadia see in AmeriCredit and also to learn some useful lessons about subprime lending and securitization along the way...

http://sumitshah.com/2009/03/20/learning-from-buffett-what-fairholme-and-leucadia-see-in-americredit/

 

In the end the investment delivered an IRR of 29%:

In October 2010, we sold all of our common shares of AmeriCredit in a cash merger

with General Motors Company. Leucadia received $830.6 million for the shares that we

spent $425.8 million to buy. We began purchasing the stock on October 19, 2007 and

sold on October 1, 2010. The $404.8 million gain resulted in a compound annual return

(IRR) of 29%.

http://www.leucadia.com/10k_docs/luk_10k_2010.pdf

 

Brooklyn Investor also has some interesting notes on the NB investment:

 

LUK paid $867.9 million for 78.95%, so the equity was valued at $1.1 billion.  Long term debt outstanding was $360 million so the total enterprise value was $1.46 billion (ignore cash as it's small relative to EV).

 

Here are the valuations against various metrics; I will use the 2011 full year figures and the five year average figures to 'normalize' them.  Three years might be a bit short and they have posted some good numbers in the past three years, and maybe ten years is too long as they may be a much better company now than ten years ago. 

 

Anyway, here are the metrics:

 

                                    FY 2011                Five year average

EV/EBITDA                4.5x                      6.4x

Pretax income              4.2x                      6.8x

EBIT/EV                      18.8%                    12.9%

EBITDA - Capex          5.7x                      8.2x

  (free cash yield)        17.5%                    12.2%

Owner earnings            22.3%                    13.7%

 

(for EBIT/EV, I actually used operating income)

 

So from a pretax income point of view, they paid a price that yields 24% on last year's earnings and close to 15% on the last five years' average earnings.

 

This means if they do just as well as they have done in the past five years (with a near depression and rising commodity prices), they can make 15% pretax returns and any upside is a free option; if they expand exports, increase margins on more added value products etc...  this will all come on top of the 15% pretax they already earn.

 

Based on free cash (using EBITDA - capex) and on an EV basis, they will earn 17.5% if National Beef keeps doing as well as it has done last year and 12.2% if they do just as well as they have done in the past five years.

 

The owner earnings yield (owner earnings here is pretax income plus D&A less capex) is 22.3% based on 2011 and 13.7% for the last five years.  Sorry, the owner earnings didn't make it into the table.

http://brooklyninvestor.blogspot.com/2012/05/national-beef.html

 

Tom makes an good observation about the size of LUK as a function of opportunities available in the future. I also think the culture is very important and LUK certainly has the desired one. If Wheeler turns out to be as talented as he is promising, I truly think we might be on to something here.

 

My nose is telling me that surf´s up...

[bargainman]

The other difference that I haven't heard anyone point out is the use of float.  LUK doesn't have a large insurance operation the way Buffett did, and yet they were still able to compound BV at an incredible rate.  I suspect that their 'substitute' for float was/is all the tax loss carryforwards they have.  If I remember correctly LUK hasn't paid taxes in a long long time...

[joepublic]

>> The other difference that I haven't heard anyone point out is the use of float.  LUK doesn't have a large insurance operation the way Buffett did,

>> and yet they were still able to compound BV at an incredible rate.

 

They had a substantial insurance operation in the 1990's. There was a company (Colonial Penn) that they purchased for $100 million which the seller was eager to get rid off. The story that I remember reading at the time was that C&S read every single contract in the company's portfolio before they purchased it. A few years later, they sold the company in two pieces for $1.5+ billion. This was another one of their home runs. The buyers were GE Capital and Conseco (which eventually went bankrupt.)

 

A short time later, there was a special dividend of $12 (at that time, the share price was in the 30s). I also believe that Cumming moved his residence from Utah to Wyoming for tax reasons before the dividend was paid. This investment did make a substantial contribution to the increase in BV.

 

[bookie71]

If I remember correctly the special dividend was treated as a return of capital.

[thepupil]

Have never really looked into Leucadia in depth, but got interested by the Fortescue note sale and lack of market reaction. BV increased and became much more certain and the stock did not move. Also, it gives them capital to make another National Beef like transaction and increase/diversify pretax operating cash flow...or just delever.

 

I am trying to do a basic net asset valuation here but am having a little trouble figuring out their post Fortescue note NAV. Does anyone have any thoughts? I am getting about 5.8B, conservatively calculated writing some holdings off entirely and taking some haircuts to a few things (even did a -200MM value for Sangart to account for future capital drain)

 

The opportunity to invest alongside these guys at NAV is intriguing, but I don't understand the Jefferies investment at all.

 

Does anyone have any more precise thoughts on what the balance of cash and other high quality short term fixed income holdings is?

Leucadia_National.xls

[biaggio]

Have never really looked into Leucadia in depth, but got interested by the Fortescue note sale and lack of market reaction. BV increased and became much more certain and the stock did not move. Also, it gives them capital to make another National Beef like transaction and increase/diversify pretax operating cash flow...or just delever.

 

I am trying to do a basic net asset valuation here but am having a little trouble figuring out their post Fortescue note NAV. Does anyone have any thoughts? I am getting about 5.8B, conservatively calculated writing some holdings off entirely and taking some haircuts to a few things (even did a -200MM value for Sangart to account for future capital drain)

 

The opportunity to invest alongside these guys at NAV is intriguing, but I don't understand the Jefferies investment at all.

 

Does anyone have any more precise thoughts on what the balance of cash and other high quality short term fixed income holdings is?

 

 

I think Brooklyn Investor had a decent write ups on LUK

 

 

http://brooklyninvestor.blogspot.ca/2012/05/luk-leucadia-national-some-quick-notes.html

 

http://brooklyninvestor.blogspot.ca/2012/09/leucadia-fmg-note-resolution.html

 

I think all the write ups on that blog are here    http://brooklyninvestor.blogspot.ca/search/label/LUK

 

[Sportgamma]

 

 

MEMPHIS, Tenn., Sept. 24, 2012 /PRNewswire/ -- Mueller Industries, Inc. (MLI) announced today that it has entered into an agreement to repurchase 10,422,859 shares of Mueller common stock owned by Leucadia National Corporation (and its subsidiaries) (LUK) at a negotiated price per share of $41.00, for an aggregate purchase price of $427,337,219.  The shares to be purchased in the repurchase transaction equate to approximately 27.2% of Mueller's common shares currently outstanding and constitute Leucadia's entire ownership stake in Mueller.  Ian M. Cumming and Joseph S. Steinberg, Leucadia's designees to the Company's Board of Directors, will resign from the Board upon the closing of the repurchase, which is expected to occur on or before September 26, 2012, subject to customary closing conditions.

 

I wander if something changed their thesis. They acquired for $408m i think in 2011.

 

 

[mankap]

I never understood the rationale behind MLI investment.

I think LUK has a big purchase lined up and need cash.With the cash coming from MLI , LUK is sitting at more than $1B in cash.

[Sportgamma]

I never understood the rationale behind MLI investment.

I think LUK has a big purchase lined up and need cash.With the cash coming from MLI , LUK is sitting at more than $1B in cash.

 

I think something is definitely up.

 

Cash (380) + MLI (427) + FMG (715) = 1,522

 

Have any details been made public as to when they receive the FMG proceedings?