This Company is Raising Cash… Should You?

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Exiting investments is nothing new for Leucadia National Corporation (NYSE: LUK).  Over the years, Leucadia has been in and out of several different businesses and equity investments.  Whether coincidental or by design, Leucadia has recently been in liquidation mode.    

In the first quarter of this year, Leucadia sold 100 million shares of its approximately 130.5 million remaining shares in Fortescue Metals Group (ASX: FMG) for $506.5 million.  This was after the company sold 117.4 million Fortescue shares in 2011 for $732.2 million.  During July 2012, the company sold its remaining position for $152.9 million. 

In addition to its common stock holdings in Fortescue, Leucadia recently redeemed its $100 million royalty note.  However, this transaction requires some explanation.  In September 2010, Leucadia began litigation against Fortescue to prevent the mining company from issuing additional royalty notes which would dilute the interest of Leucadia.  Leucadia was earning substantial royalties from the notes issued by Fortescue and any dilution would have a material impact on the company’s cash flow from those notes.  A settlement was reached in September 2012 by which Leucadia received $715 million to redeem its royalty note.  As a result of this transaction, Leucadia expects to record a pre-tax gain of approximately $526 million in the fourth quarter. 

The company continued to turn equity investments into cash when it reached a deal with Mueller Industries (NYSE: MLI) whereby Mueller agreed to repurchase from Leucadia 10,422,859 shares of Mueller common stock for a purchase price of $41.00 per share or $427.34 million.  Management did not immediately indicate the reason for the transaction, but it would appear that there was a desire to take advantage of the opportunity to raise cash from this investment for better allocation later.

Then just last week, Leucadia announced the sale of its wholly-owned subsidiary, Keen Energy Services, LLC for $140 million.  The purchase price included cash totaling $100 million and a $40 million four-year interest bearing promissory note.  In addition, the company stated that it will also retain Keen’s net working capital and expects to report a pre-tax loss of approximately $19.3 million on the sale.  Leucadia made its initial investment in Keen six years ago when it invested $60 million for a 30% stake in the company.

While the redemption of the Fortescue bonds was prompted by litigation, the settlement may have been an effort by Leucadia to receive the present value of the royalty in advance.  It is unlikely that Leucadia management left much, if any, money on the table.  It is also hard to argue with the sale of the Fortescue common stock.  These transactions appear to have been very timely as the stock price of Fortescue has continued to decline.

The sale of the Mueller stake and Keen are a little more unclear.  Management did not really offer much in the way of an explanation.  However, the lack of immediate clarity on such moves is not unusual.  Detailed explanations are normally saved for the annual letter to shareholders that is typically released in April of each year. 

The recent disposals by Leucadia may be part of an ongoing effort to deleverage the company as well as raise additional cash for better investment opportunities that may arise from difficult markets.  Furthermore, the company’s acquisition of National Beef Packing for $867.9 million was paid in cash showing management’s lack of desire to use debt to finance acquisitions.

In addition to its large acquisition of National Beef at the end of 2011, the company is still holding large positions in Jefferies Group (NYSE: JEF) and Inmet Mining (TSX: IMN).  The company has reported large losses on its stake in Jefferies, but management seems confident in the investment banks leadership and appears loyal to this holding for now.  Its position in Inmet has been more successful on paper producing modest gains in fair value.  Management has been positive on what it believes to be the future prospects of Inmet and copper in general, but might not be as attached to its stake in Inmet if its positive view on copper turns negative.

The actions of Leucadia may serve as a wakeup call to many investors.  With several market indices trading near all-time highs recently, it could be time to evaluate personal positions and consider liquidating weaker holdings.


Alex Gray owns shares of Leucadia National Corporation. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Jefferies Group and Leucadia National. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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