JEF - Jefferies Group

[Guest hellsten]

The market doesn't seem to be very happy about this acquisition. LUK -5%. Somehow I'm not surprised. I guess the market puts 2 and 2 together and thinks the future is not very bright for JEF and LUK:

Since 1990:

JEF 15.9% CAGR

LUK 13.1% CAGR

 

Since 2000:

JEF 9.2% CAGR

LUK 9.4% CAGR

[WhoIsWarren]

Can anyone guess why they've decided to spin Crimson Wine? 

 

I've not focused on this business much up to now and know nothing about wine.  Anyone??

[Grenville]

Based on the ways things are trading, you can buy LUK on the cheap through JEF shares.

 

1 JEF share = 0.81 LUK

or $16 for 0.81 LUK ~ $19.8/ LUK share

[bmichaud]

I'm lost - what is the point of the buyback simultaneous with share issuance?

[txlaw]

Wow, this is great.

 

The ratio of LUK shares per JEF share seems just about right to me.

[enoch01]

I'm lost - what is the point of the buynback simultaneous with share issuance?

 

It's what you want to do if you want to buyback cheap shares, and save cash when you make the Jefferies acquisition.

[bmichaud]

I still don't understand the mathematics - are proforma-LUK shares now suddenly cheaper AFTER paying a premium for JEF shares not owned? Wouldn't they have been better off buying $500mm more JEF shares on the open mkt before taking it over?    Perhaps it's a neat financial engineering trick - I'm curious...

[JRH]

I'm lost - what is the point of the buynback simultaneous with share issuance?

 

It's what you want to do if you want to buyback cheap shares, and save cash when you make the Jefferies acquisition.

 

The buyback grants them optionality during and after the merger process.  I'm happy to see it, given that I believe the Leucadia pricipals display good opportunistic judgment.

[JRH]

I still don't understand the mathematics - are proforma-LUK shares now suddenly cheaper AFTER paying a premium for JEF shares not owned? Wouldn't they have been better off buying $500mm more JEF shares on the open mkt before taking it over?    Perhaps it's a neat financial engineering trick - I'm curious...

 

They are limited to 30% ownership.  I think the materials today state they were at 28.6% (due to share grants, I would guess).  I guess they could have sneaked in a few more shares to get back to 30%.

[link01]

I still don't understand the mathematics - are proforma-LUK shares now suddenly cheaper AFTER paying a premium for JEF shares not owned? Wouldn't they have been better off buying $500mm more JEF shares on the open mkt before taking it over?    Perhaps it's a neat financial engineering trick - I'm curious...

 

i think the rationale is simple: they bagged a big operating co that will ensure luk maximizes monetization of their NOL's, most importanntly, accelerating the utilization of them.

 

they also go far to address  the leadership sccession issue. it seems to me that cummings was especially ready to pass the baton.

 

i have to admit i'm not too fond of the operating model of i-banks, tho. especially in the new normal...

[Grenville]

Good conference call. (~40mins)

 

Richard Handler, Brian Friedman, Peg Broadbent, Joe Orlando, Justin Wheeler, and Joe Steinberg ("coaxed onto the call and not an avid fan of conference calls") were on the conference call.

 

Richard Handler and Brian Friedman answered all the questions though.

 

[Kiltacular]

Based on the ways things are trading, you can buy LUK on the cheap through JEF shares.

 

1 JEF share = 0.81 LUK

or $16 for 0.81 LUK ~ $19.8/ LUK share

 

Does anyone disagree with this?

 

You'd think this spread would have closed by now today.

[Sullivcd]

What is the spread if Crimson Wine is spun off prior to the merger?

[Parsad]

Based on the ways things are trading, you can buy LUK on the cheap through JEF shares.

 

1 JEF share = 0.81 LUK

or $16 for 0.81 LUK ~ $19.8/ LUK share

 

Does anyone disagree with this?

 

You'd think this spread would have closed by now today.

 

No, you are correct.  We bought a bunch of JEF this morning.  The spread is still there because there is always the remote possibility the deal will be shot down by shareholders.  I don't think that is likely. 

 

It's a very good deal for both companies, and I think JEF under Leucadia could really start to take some market share away from the big boys over the ensuing 20 years, while Leucadia in one fell swoop has deepened their bench and solved any possible succession issues.  Cheers!

[A_Hamilton]

Based on the ways things are trading, you can buy LUK on the cheap through JEF shares.

 

1 JEF share = 0.81 LUK

or $16 for 0.81 LUK ~ $19.8/ LUK share

 

Does anyone disagree with this?

 

You'd think this spread would have closed by now today.

 

 

Assuming Crimson is worth BV, you are talking about reduction needing to be applied to JEF.

 

No, you are correct.  We bought a bunch of JEF this morning.  The spread is still there because there is always the remote possibility the deal will be shot down by shareholders.  I don't think that is likely. 

 

It's a very good deal for both companies, and I think JEF under Leucadia could really start to take some market share away from the big boys over the ensuing 20 years, while Leucadia in one fell swoop has deepened their bench and solved any possible succession issues.  Cheers!

 

Sorry to disagree guys, but a buyer of LUK today receives LUK inclusive of Crimson Wine Group. A buyer of JEF receives 0.81 shares of LUK ex-crimson wine group.

 

It has a material effect on the arb spread.

 

 

[Kraven]

Based on the ways things are trading, you can buy LUK on the cheap through JEF shares.

 

1 JEF share = 0.81 LUK

or $16 for 0.81 LUK ~ $19.8/ LUK share

 

Does anyone disagree with this?

 

You'd think this spread would have closed by now today.

 

 

Assuming Crimson is worth BV, you are talking about reduction needing to be applied to JEF.

 

No, you are correct.  We bought a bunch of JEF this morning.  The spread is still there because there is always the remote possibility the deal will be shot down by shareholders.  I don't think that is likely. 

 

It's a very good deal for both companies, and I think JEF under Leucadia could really start to take some market share away from the big boys over the ensuing 20 years, while Leucadia in one fell swoop has deepened their bench and solved any possible succession issues.  Cheers!

 

Sorry to disagree guys, but a buyer of LUK today receives LUK inclusive of Crimson Wine Group. A buyer of JEF receives 0.81 shares of LUK ex-crimson wine group.

 

It has a material effect on the arb spread.

 

Anyone have a sense of what Crimson is worth?  I just did a quick look in the K and it appears that it's about 75 cents of BV for each LUK share.  Sales for 2011 were around $36 mil.  I didn't see any info on the profitability.

[A_Hamilton]

Based on the ways things are trading, you can buy LUK on the cheap through JEF shares.

 

1 JEF share = 0.81 LUK

or $16 for 0.81 LUK ~ $19.8/ LUK share

 

Does anyone disagree with this?

 

You'd think this spread would have closed by now today.

 

 

Assuming Crimson is worth BV, you are talking about reduction needing to be applied to JEF.

 

No, you are correct.  We bought a bunch of JEF this morning.  The spread is still there because there is always the remote possibility the deal will be shot down by shareholders.  I don't think that is likely. 

 

It's a very good deal for both companies, and I think JEF under Leucadia could really start to take some market share away from the big boys over the ensuing 20 years, while Leucadia in one fell swoop has deepened their bench and solved any possible succession issues.  Cheers!

 

Sorry to disagree guys, but a buyer of LUK today receives LUK inclusive of Crimson Wine Group. A buyer of JEF receives 0.81 shares of LUK ex-crimson wine group.

 

It has a material effect on the arb spread.

 

Anyone have a sense of what Crimson is worth?  I just did a quick look in the K and it appears that it's about 75 cents of BV for each LUK share.  Sales for 2011 were around $36 mil.  I didn't see any info on the profitability.

 

I don't know what is worth. Seems like BV is generous for a pretty difficult business/trophy business. That said, do you want to be short an illiquid name as part of trying to arb the spread?

[Kraven]

Based on the ways things are trading, you can buy LUK on the cheap through JEF shares.

 

1 JEF share = 0.81 LUK

or $16 for 0.81 LUK ~ $19.8/ LUK share

 

Does anyone disagree with this?

 

You'd think this spread would have closed by now today.

 

 

Assuming Crimson is worth BV, you are talking about reduction needing to be applied to JEF.

 

No, you are correct.  We bought a bunch of JEF this morning.  The spread is still there because there is always the remote possibility the deal will be shot down by shareholders.  I don't think that is likely. 

 

It's a very good deal for both companies, and I think JEF under Leucadia could really start to take some market share away from the big boys over the ensuing 20 years, while Leucadia in one fell swoop has deepened their bench and solved any possible succession issues.  Cheers!

 

Sorry to disagree guys, but a buyer of LUK today receives LUK inclusive of Crimson Wine Group. A buyer of JEF receives 0.81 shares of LUK ex-crimson wine group.

 

It has a material effect on the arb spread.

 

Anyone have a sense of what Crimson is worth?  I just did a quick look in the K and it appears that it's about 75 cents of BV for each LUK share.  Sales for 2011 were around $36 mil.  I didn't see any info on the profitability.

 

I don't know what is worth. Seems like BV is generous for a pretty difficult business/trophy business. That said, do you want to be short an illiquid name as part of trying to arb the spread?

 

I'm not arbing anything.  Just asking a question, my friend.  It wasn't intended to be directed to you. 

[joepublic]

I am not sure what it is worth, but we have a precedent.

 

About 10 years ago, Leucadia spun off a company called HomeFed (HOFD). It is very illiquid and the current quote is around 25. It has 2 land areas in California that are going to become master planned communities (I am not sure what stage of development they are in.)

 

At the time of the spinoff, it traded for about $4/share (around book value as in LUK's balance sheet.) It is currently around $25. It reached as high as $60 dollars around 2006.

 

I am hoping for a similar run-up in the price. I do not believe that a company of this size in the wine industry will trade as an independent for long.

[JRH]

Interesting liquidity guidelines Leucadia has identified (slide 30). 

 

Looks like they currently have more than adequate liquidity, although I don't think it is necessarily apparent just from this whether their recent FMG, MLI, Keen sales are related solely to meeting those conditions for the JEF merger.  It is interesting to note that they are stating that they will not make new equity investments in excess of 10% of book value "at time of investment".  Also:

 

"Leucadia will target (i) a minimum liquid assets / parent debt ratio >1.0x (current ratio of 3.0x) and (ii) minimum cash and cash equivalents equal to 10% of book value (excluding Jefferies)."

 

(ii) seems to imply ~$520M is an operating cash buffer (same slide + supplement on 32 shows adjusted book value of ~$5.2B without Crimson and Jefferies).  They announced an authorization to buyback <=25M shares (~$500M).  That gives them as little as a half billion and as much as a billion in cash to work with, depending on actual number of shares bought back.

 

Seems to me like the merger prompted a re-assessment of their holdings on a marginal benefit basis against what they expect to be able to make on the opportunity flow from Jefferies.  That would explain past and future (Crimson) liquidations.

[Liberty]

http://www.theglobeandmail.com/globe-investor/baby-berkshire-leucadia-matures-with-jefferies-deal/article5203491/

[Kiltacular]

Sorry to disagree guys, but a buyer of LUK today receives LUK inclusive of Crimson Wine Group. A buyer of JEF receives 0.81 shares of LUK ex-crimson wine group.

 

It has a material effect on the arb spread.

 

I think this is correct, as Crimson has a book of $197mm and there are almost 245mm shares of LUK outstanding pre-merger.  Also, it sounded like LUK might pay a 25cent dividend in December of this year which JEF holders obviously won't get -- it wasn't crystal clear on the call.  Still, there may be some space in there on the basis that Parsad was talking about. 

 

Thinking out loud, I'd wonder if either or both of Cummings / Steinberg wants control of Crimson for "fun" -- if so, likely Cummings.  It doesn't matter much but may be worth watching, post spin, as joepublic mentions.

 

Interesting liquidity guidelines Leucadia has identified (slide 30). 

 

Looks like they currently have more than adequate liquidity, although I don't think it is necessarily apparent just from this whether their recent FMG, MLI, Keen sales are related solely to meeting those conditions for the JEF merger.  It is interesting to note that they are stating that they will not make new equity investments in excess of 10% of book value "at time of investment".  Also:

 

"Leucadia will target (i) a minimum liquid assets / parent debt ratio >1.0x (current ratio of 3.0x) and (ii) minimum cash and cash equivalents equal to 10% of book value (excluding Jefferies)."

 

(ii) seems to imply ~$520M is an operating cash buffer (same slide + supplement on 32 shows adjusted book value of ~$5.2B without Crimson and Jefferies).  They announced an authorization to buyback <=25M shares (~$500M).  That gives them as little as a half billion and as much as a billion in cash to work with, depending on actual number of shares bought back.

 

Seems to me like the merger prompted a re-assessment of their holdings on a marginal benefit basis against what they expect to be able to make on the opportunity flow from Jefferies.  That would explain past and future (Crimson) liquidations.

 

I noticed this too. All the selling / capital raising LUK did pre-merger makes sense if (1) Leucadia wanted to buyback shares but (2) also wanted to figure out a way to accelerate the use of the loss carryforwards.  Plus, they help solidify succession.  JEF gets a parent that has capital and this may help with ratings, etc.

 

All in all, at this point, it looks like a very interesting deal as long as Handler doesn't go off the reservation.  I'd like to see / know that, at least, Steinberg is keeping his shares.  If Cummings keeps most or all of his, that's a bonus in my book. 

 

Let's keep those incentives aligned.

[Viking]

When asked on the conference call why now, the answer:

1.) LUK in great shape

2.) JEF in great shape

3.) supports managment transition for LUK

4.) supports growth of JEF; see investment banking competition shrinking and significant opportunities moving forward (take advantage of volatility versus it being a negative for JEF like last year)

 

The question that was not really answered: "Was the price being paid for JEF not too low?" The answer provided (my interpretation) was both companies are selling at low valuations so it is a wash for JEF shareholders. 

 

Here is an interesting take: http://www.cnbc.com/id/49795381?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

 

When you look at LUK, the two big issues were management transition and how they were going to utilize the tax loss carryforwards. This transaction looks to address both those concerns. The transaction also looks to be of great value to JEF, given the current finacial strength of LUK. Interesting that LUK is trading lower on the news.

 

Probably the most important question is how good Handler is, the new CEO. If he is above average the stock has a lot of upside over the next decade. Is this an opportunity to get in on the ground floor, similar to purchasing LUK in the 80's or BRK back in the 70's? Love these type of opportunities and one of the reasons I am happy to sit on a large amount of cash (at times). Will be reading lots over the next days. 

[matjone]

If I haven't made any mistakes (doubtful premise), then it looks like you can get this thing  for about $1.05 cheaper buying JEF vs buying LUK, but doing it that way you don't get the $0.25 dividend or crimson which has a bv of .81/luk shr.  So the difference seems about right if crimson is worth BV.

 

Like Viking said the million dollar question is how good Handler and co will do going forward.

 

 

[Parsad]

If I haven't made any mistakes (doubtful premise), then it looks like you can get this thing  for about $1.05 cheaper buying JEF vs buying LUK, but doing it that way you don't get the $0.25 dividend or crimson which has a bv of .81/luk shr.  So the difference seems about right if crimson is worth BV.

 

Like Viking said the million dollar question is how good Handler and co will do going forward.

 

Cummings and Steinberg aren't going anywhere.  Cummings is just removing himself from day to day duties, but he will be on the board.  As far as I know, Justin Wheeler isn't going anywhere either.  So, you've got the best of Leucadia and the best of Jefferies working for Leucadia shareholders now...with twice as many ideas to share and make money from.  Remember, it was Handler who brought Fortescue to Leucadia, and that may have been the best large investment ever made by LUK.  Cheers!