Thursday, 27 December 2012

Valuing the New Leucadia National

It's difficult to value companies like Leucadia National, which has elements of a conglomerate, a hedge fund and a private equity firm all at the same time.  Wholly owned operating businesses in a range of industries, common stock positions, royalty streams - Leucadia has used a wide net when fishing for value opportunities.  In the past, shareholders tended to use book value as a rough proxy for intrinsic value, with the stock price moving roughly in tandem with shareholder's equity over long periods of time.  However, there have also been long stretches when the share price has traded significantly above and below book value.
The recently announced merger with Jefferies, combined with the 2011 purchase of National Beef, means that the operating business component of Leucadia's value has expanded markedly, and the approach to valuing the company must be revisited.  The appropriate way to value the company is probably to attach a multiple to operating earnings and add it to book value.  Upon the announcement of the merger, Leucadia estimated its combined business will have a book value of $9.3 billion, or $24.69 per share (including the dilutive effect of shares issued in the merger transaction).  Net to Leucadia, its four largest operating businesses - Jefferies, National Beef, Berkadia and Garcadia - currently produce roughly $480 million in combined after-tax earnings.  A 12x multiple would make this earnings stream worth around $5.8 billion or about $15 per share.  Leucadia, then, may be worth around $40 per share, significantly higher than it currently trades for.
Whatever the method Leucadia's managers themselves use to value their business, they must agree that the business is undervalued - after all, they recently initiated a share repurchase program.  Wise investors will consider allocating some of their own wealth alongside one of the finest collections of investing talent in the world.
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