I'm a child of the South. It may not be well known in the remainder of the country, but in the South you can say the meanest, nastiest things imaginable about people just as long as you add "Bless his heart" to the end of the sentence.
Yesterday Standard & Poor's Ratings Services lowered diversified holding company Leucadia's
In other words, S&P said: "Leucadia is a telecom investor, bless its heart."
Leucadia has been favorably (but still perhaps unfairly) crowned the next Berkshire Hathaway
So when Leucadia expended some 25% of its entire shareholders' equity to buy out telecom basket case WilTel, it raised more than a few eyebrows among investors and, apparently, the ratings agencies. Follow this up with Leucadia's petition to the Justice Department to allow it to purchase up to 50% of MCI
S&P noted that the telecom purchases represent a change in investment strategy for Leucadia in that it is willing to risk such a concentrated portion of its equity on distressed businesses that may require additional restructuring, in industries fraught with risk.
Bless their hearts, they've walked right into the midst of a telecom nightmare. Didn't Leucadia get the memo? MCI and AT&T
You may rest assured that Leucadia got the memo after all. This is, after all, a cash-rich company in the same way that the telecom firms are not. Besides, when everyone thinks the same thing at the same time, it should be apparent that nobody is thinking very much. MCI is a bad business, but that doesn't necessarily mean that its stock isn't cheap. It also offers by itself some characteristics that would be extraordinarily attractive to a cash machine such as Leucadia, including massive net operating loss carryforwards, some sellable noncore operations, and plenty of potential for operational improvements.
None of this is to say that Leucadia's eventual success is assured or that telecommunications has bottomed out and is going to slowly improve as an industry. But a company with substantial liquid assets that is willing to endure the volatility isn't necessarily making a bad move in going in while the floodwaters rage and waiting for the sun to come out. In fact, there may not be a better play on an eventual improvement in telecom than to hold Leucadia. After all, at a minimum its management doesn't have a legacy of incinerating capital by the hundreds of billions.
The S&P's decision not to give Leucadia the benefit of the doubt makes sense on a strict macro level: its short-term risks have certainly increased. But that's about as far as it goes.
Bill Mann owns shares of Berkshire Hathaway and is a former telecommunications executive.
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