Suing a company you partially own is a bit like being strict with your child: You feel bad doing it, but you need to remind them who's in charge.
That's the case with Leucadia (NYSE: LUK) and the company in which it holds an 8% stake, Australian ore miner Fortescue Metals. Leucadia is a Berkshire Hathaway (NYSE: BRK-B)-like conglomerate with equity holdings in 25% of subprime auto financier AmeriCredit Corporation (NYSE: ACF) and a 28% stake in the investment bank Jeffries Group (NYSE: JEF). It sold Fortescue $100 million in subordinated notes in July 2006, the interest on which would be equal to 4% of revenue invoiced from a particular mine. Leucadia has earned $172 million on this deal, with forecasts of $826 million total before the deal expires.
Fortescue, however, wants the right to issue more notes to other potential investors, apparently paid out of the same 4%! Leucadia responded turning the hose on its unruly charge.
Leucadia has been run by the same experienced guys for decades. They just wouldn't leave this door open in a deal, and they're not particularly litigious, based on a perusal of recent 10-K's. These two points alone tell me that Leucadia is justified in this course of action.
Given how much Fortescue has paid out to date, at rates that would give payday lenders goosebumps, you have to wonder whether Fortescue -- which hasn't actually issued the notes, but says it wants to -- is just trying to get Leucadia to renegotiate this deal to raise other financing. However, in the process, Fortescue risks damaging its reputation with other debtholders, who may not trust the company to do a deal with them.
Meanwhile, Leucadia shareholders should be proud that management is aggressively protecting their interests. Leucadia's interest income could be materially affected, which might provoke hand-wringing among some investors. Personally, I bring a holistic view to Leucadia. Its income stream is already irregular, and overall company value depends a lot on the equity value of the companies they own.
In that light, I say Leucadia should lock its ornery child in the closet, not budge an inch, and get on with business.
