Merger and a Spinoff at the Same Time

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As part of the New York-based company’s expected merger with investment banking powerhouse Jefferies Group (NYSE: JEF), Leucadia National (NYSE: LUK) has announced plans to spin off its Crimson Wine division and pay a “spin-off” dividend to its shareholders. The spin-off is expected to close on February 25, 2013. Although the terms of the Jefferies-Leucadia merger have not yet been finalized, it appears likely that the deal will be finalized by the end of the second quarter of 2013. However, legal issues or shareholder concerns may yet complicate or delay the deal.

For now, traders who wish to find short-term value in Leucadia may find it profitable to participate in the Crimson Wine spin-off.

About Leucadia, Crimson Wine and Jefferies Group

Leucadia National Corporation is a conglomerate with operations in a number of agricultural, gaming, service, and medical industries. The company’s agricultural holdings include a vertically-integrated beef processing unit and the soon-to-be-independent Crimson Wine winery operation. Its materials division produces raw lumber and various lumber products for sale to homeowners, building contractors and other customers. Leucadia’s medical products division consists of several trial-phase compounds that treat certain side effects of strokes, clotting events and sickle-cell anemia. The company also owns a casino and Hard Rock Cafe property in Biloxi, Mississippi and engages in several other miscellaneous operations. It employs about 12,000 workers and had an EBITDA of $902.7 million on 2012 revenues of $7.1 billion.

Crimson Wine is Leucadia’s winery division. The unit operates growing and processing operations in the West Coast region of the United States and distributes its products to a modest number of boutique liquor stores and upscale restaurants. As consumer tastes have evolved, the company has also begun to sell its high-value, low-cost wines to supermarket chains and big-box liquor stores within its trade area.

The Jefferies Group is an investment banking firm that facilitates the sale, distribution and exchange of securities like stocks, ADRs, ETFs, options, bonds, closed-end funds, and several other types of esoteric investment products. It also manages a diverse portfolio of assets for mutual funds, private investors and other customers. Its asset management group works with convertible bonds and commodities. This division also makes strategic investments in various assets and companies. The Jefferies Group earned $265 million on 2012 revenues of $2.9 billion.

How the Deal Is Structured

Under the terms of the spin-off deal, Leucadia shareholders of record as of February 11, 2013 will receive one share of the newly-issued Crimson Wine stock for every 10 Leucadia shares that they own. Any leftover fractional shares will be distributed to the appropriate shareholders as pro-rated cash payments.

The new Crimson Wine stock will trade on the over-the-counter markets and can be identified by its CUSIP number of22662X 100. There will be about 24 million outstanding shares of Crimson Wine after the distribution at a par value of $1 per share. As such, Leucadia shareholders stand to earn a premium of about 3 percent relative to the company’s current stock price of $28 per share.

Under the terms of the merger deal, all Jefferies Group shareholders will receive 8.1 shares of Leucadia stock for every 10 shares of Jefferies stock that they own. Although the record date for this transaction has not yet been announced, it is expected to occur by mid-April. Relative to Jefferies’s current stock price of $21.35 per share, this represents a premium of approximately 3.3 percent.

Complications and Legal Issues

At this point, the Crimson Wine Group spin-off appears to be all but assured. Since the merger between Leucadia and Jefferies is predicated upon the successful completion of the spin-off, it is likely that a last-minute failure would scuttle the larger merger deal. Conversely, a break-up of the merger agreement before the spin-off’s completion could render the transaction moot. However, it is overwhelmingly likely that Crimson Wine will begin trading as a separate company on February 25.

Although the merger deal is shrouded in some uncertainty, it also appears likely to be finalized by the end of the first half of 2013.

Long-Term Outlook

Crimson Wine Group has long been one of Leucadia’s least-profitable divisions. As such, its long-term prospects remain unclear. However, there is some reason to believe that a newly-independent Crimson may be able to make targeted investments in certain individual assets and distribution chains. Although some stock-watchers have expressed reservations about the deal, others are more bullish. After all, the North American wine market is growing at a solid pace.

Crimson Wine may also benefit from its divorce from Leucadia in a more subtle fashion. Leucadia is heavily reliant on two aging principals who may retire within the next few years. Thus far, the company has been opaque about its “Plan B” in the event that this occurs. Should a clear post-retirement plan fail to emerge, the company may be thrown into strategic disarray. Since Crimson Wine does not suffer from such a reliance on a small group of principals, it may represent a safer long-term bet.

In sum, Crimson Wine offers a stake on a risky but promising company’s future.  The spread on the JEF/LUK merger; however, may close in the coming weeks. In other words, timing may be critical.  More information on the JEF/LUK merger coming soon on ArbIdeas.com.


mthiessen or affiliates are long JEF and short LUK. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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