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:JEF) 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.
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.
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.