This Mini-Berkshire Made a Brilliant Move

Not many companies can stack up to the much-admired Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . Of course, if the comparison is even being made, then that company is probably doing something very right.

Much smaller but similarly managed Leucadia (NYSE: LUK  ) is one of a small group of companies that can legitimately carry the title "mini-Berkshire." The company is run by two outstanding managers who have built a world-class portfolio over the past three-plus decades. While the conglomerate may have flown under many investors' radars, its recent purchase of Jefferies (NYSE: JEF  ) has it paying attention.

Big acquisitions like this can often be a dicey proposition, but as I dig into this deal I think Leucadia may have just made its best move yet.

Quick review
Leucadia has a long history of building value. Since Ian Cumming and Joseph Steinburg took a controlling interest in the company in 1978, the duo has been able to compound book value by 18.5% annually. That may not be quite as impressive as Berkshire's 46-year, 20% figure that often gets thrown around, but I'd still gladly take it. Cumming and Steinberg are two very talented managers who together owned nearly a fifth of the company before this acquisition.

For an example of their investing prowess, take a look at this sweet, Buffett-esque deal: In 2006, the company bought into an Australian steel company, Fortescue  Metals. It was an unloved company at the time, as so many value investor targets are. Leucadia took a $444 million equity position in addition to a 13-year, $100 million note that gave Leucadia a 4% royalty on two of Fortescue's mines. The deal ended up being so favorable to Leucadia that it caused a rift between the two companies, which was settled only when Fortescue just recently bought back the loan at a huge premium. The total returns for Leucadia totaled in the billions after just six years.

iBank
For those with an eye on Leucadia, the deal for Jefferies wasn't too much of a surprise. Before this week's big purchase, the company already owned close to 30% of the investment bank. In previous articles, I've laid out the case for an investment in Jefferies as one of the better-positioned investment banks, with a great management team. And that same management will soon be going to work for Leucadia shareholders. Upon completion of the acquisition, Jefferies CEO Richard Handler will become the CEO of Leucadia -- a surprising and unconventional move.

Following a big drop-off during the financial meltdown, Jefferies has steadily built its revenue back up  over the past few years and has significantly improved its balance sheet. And with the backing of Leucadia's $2.4 billion cash pile, liquidity concerns should be officially eliminated, making Jefferies, in my view, one of the most attractive and bulletproof investment banks out there.

As mentioned in a recent Barron's article, Jefferies  is the only securities firm to produce attractive returns in the stock market since 2000 -- up nearly 160%. The only other firm to show even positive market returns is Goldman Sachs (NYSE: GS  ) .

Leucadia and Jefferies have had a long relationship, leaving  few surprises going into the merger. Both Cumming and Steinberg have been on the board of Jefferies since 2008.

The deal works out to be great for both parties. While some investors may have preferred Jefferies as a standalone investment bank, I believe it will benefit by being under the umbrella of a diversified holdings company. Up until now, Jefferies has been trading a discount to book value -- something that's not unusual in the banking industry right now. Immediately after the deal announcement, though, Jefferies' shares skyrocketed and the P/B popped up to just above book value.

Leucadia, meanwhile, gets to finish what it started several years ago and bring in-house a very profitable business that it can add to its stable of meat processing plants, vineyards, casinos, and more. Further, Leucadia's purchase of Jefferies gives it long-term viability in the C-suite -- something that has bothered investors recently.

With Cumming and Steinberg both well qualified for an AARP membership, some were worried who would eventually take over. Now we know with little doubt that Richard Handler will pilot the company forward. This is not only an answer, but a great one at that. As I mentioned before, Handler is a conservative operator who knows how to manage money and will only be more effective with a large capital base to play with.

Despite all of it's potential for the future, Leucadia still trades near a 52-week low. It's also cheaper than Berkshire on a book value basis. Leucadia's stock can be had at a P/B of 0.82, while Berkshire's trades at  1.15. For a great long-term hold that will reward its loyal shareholders at a discount to the value of its assets, look no further than Leucadia National.

The original
Even though Leucadia may have the lower valuation, that doesn't preclude you from owning both it and Berkshire. Warren Buffett's long track record of success has made him one of the best investors of all time. With Buffett at the helm, Berkshire Hathaway has grown book value per share at a compounded annual rate of 19.8% for nearly 50 years! Despite an incredible historical track record, investors have to understand the key issues to watch moving forward. To help investors, the Fool's resident Berkshire Hathaway expert, Joe Magyer, has created this 
premium research report on the company. Inside you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.


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  • Report this Comment On November 15, 2012, at 12:29 PM, FoolishLonghorn wrote:

    By any measure, LUK is a dog. It trails the S&P 500 for 1, 3, and 5 year returns, and not by a small amount. LUK did great in the go-go days leading into the crash of 2009, but that can be said of many. And it has sucked eggs ever since.

    Bershire, in spite of all the praise for Buffet, is very close to a SP 500 mirror for any time period of more than a year.

    Give me the big picture, not some great return on a single investment. Even a blind squirrel finds the occasional nut.

  • Report this Comment On November 15, 2012, at 12:58 PM, JohnCLeven wrote:

    The big picture is that both companies share prices have been weak recently, while the underlying businesses have been growing strongly. Eventually, the share prices are going to have to rise to meet the underlying value that both companies have created in the past few years.

    I don't follow LUK very closely, but it seems that a company that grows book value as well as LUK historically does, should not be trading for 0.9x BV.

    Similarly, BRK.B is at 1.2x BV which is silly with a BV growth rate of 19.85 compounded annually over the past 47 years.

    Long BRK.B since June 2012 (which is the S&P btw)

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