DETTA INLÄGG ÄR ETT UTDRAG UR KVARTALSBREVET JAG SKICKADE TILL PANDIUMS ANDELSÄGARE 31 JANUARI 2016.
Leucadia National Corporation (LUK) is a diversified holding company consisting of financial services businesses and investments in other industries. Holdings include the investment bank Jefferies, Spectrum Brands (the manufacturer of e.g. Varta batteries and Stanley tools), an auto dealership system, a maker of plastic netting and an Italian fixed wireless broadband.
LUK has great management. When Ian Cumming and Joseph Steinberg took over LUK in 1978 it had a negative book value of USD 8 million. Through clever contrarian investments they grew the value to USD 6.8 billion by 2012 when they merged with Jefferies. Then Ian and Joseph stepped down from the day to day operations and the leadership duo of Jefferies, Richard Handler and Brian Friedman, took over. Joseph stayed as Chairman of the Board. Their track record is equally impressive. From 2001, when Richard took over as CEO, until 2013 Jefferies was by far the best performing investment bank in the US. It produced a total return of 220% compared with e.g. Goldman Sachs that only returned 57%.
I like LUK for other reasons as well. It owns a portfolio of companies with strong position in their respective industries. LUK is also unique in that it is combining permanent capital from the Leucadia balance sheet, the deal sourcing capability of the Jefferies investment bank and the flexibility and speed of a lightly regulated entity. This has enabled them to develop a niche as a provider of emergency capital, meaning that the provide cash to companies in trouble. If done correctly this provides low valuations and control.
The investment in FXCM, a leading online foreign exchange trading platform, is a good example. On the morning of January 15th, 2015, the Swiss National Bank scrapped the Swiss franc peg to the Euro. The franc immediately soared 30% which led to huge losses for some of FXCM’s customers. By 14:00 its customers owed FXCM over USD 200 million and the company was in risk of being shut down because of its inability to meet the regulatory capital requirements. The management of FXCM contacted LUK (through Jefferies) and asked for help. At 15:00 the next day LUK had analysed the company, written agreements and sent over a check, thereby saving FXCM from bankruptcy. Needless to say, FXCM was not a very tough negotiator and less than a year later it seems that the deal will be very profitable. There are very few companies that can provide these sums of money as fast and that is a great advantage.
There are a couple of reasons LUK is cheap now. Profits have declined lately, mainly because of poor results from a recently acquired futures trading business, that is now being wound-down. Further, Jefferies has gotten a fair amount of investment banking business from the oil and gas industry, which is obviously slowing down. Besides that LUK is not a well understood company. It is complex, with diverse assets in unrelated industries, and there is just one analyst covering the company.
We bought LUK at a 20% discount to the tangible net asset value. Historically LUK has been valued at a 20 - 40% premium. Going forward I think LUK might produce a 10% or higher return on tangible book. Of that about half will be returned to the shareholders through dividends and share repurchases. Adding up the dividend yield, the expected book value growth and the change in valuation multiple implies a high double digit return over a couple of years. At this valuation, combined with the track record and quality of assets, I see low risk of permanent capital loss.