Leucadia National CEO Keeps His Confidence in Jefferies Group, Inc. (JEF) and AmeriCredit Corp. (ACF)
Leucadia is often referred as mini-Berkshire; it is run by great investors Chairman Ian Cumming and President Joe Steinberg. Contrary to Warren Buffett's favorite investment strategy, Leucadia is not looking for good companies at fair prices and holding them “forever”. They concentrate on deep value investments in distressed or out of favor assets, and stay within their circle of competence which includes, among others, telecommunications, lending/banking, real-estate and mining industries. Once they control the company they turn it around and sell it for what have been historically excess returns.
The declines of Leucadia’s book value was caused by the collapse of the prices of the varieties of investment the company owns. As the investment gurus in distressed assets, Leucadia chairman Ian Cumming and President Joe Steinberg bought these assets at low prices, just to find that the prices went even lower. Among the investments Jefferies Group, Inc. (JEF) and AmeriCredit Corp. (ACF) are two public traded companies that are owned by some of other Gurus. Leucadia paid $405.3 million for 25% of the company, today the stock is about 40% lower. The prices of JEF is closer to what Leucadia has paid, but that is after the stock doubled from its March lows. As the capital market freezes, the business of AmeriCredit faces unprecedented challenges. But Ian Cumming and Joe Steinberg keeps their confidence in the long term durability of these companies. This is the quote about the two companies in their shareholder letter released today.
Jefferies Group, Inc. (JEF)
Jefferies, listed on the NYSE (symbol: JEF), is a full-service global investment bank and institutional securities firm. Jefferies offers its customers capital markets, merger and acquisition, restructuring and other financial advisory services.
In April 2008, we sold to Jefferies 10,000,000 Leucadia shares at $49.83 per share and received 26,585,310 shares of Jefferies stock and $100 million in cash. In cash transactions during 2008, we increased our holdings to 48,585,385 shares, which is approximately 30% of Jefferies. The total investment was $794.4 million (the largest single investment we have ever made) and the fair market value of our investment was $683.1 million at December 31, 2008.
Jefferies is not in trouble, not a ward of the U.S. Government, not burdened by toxic assets and not overleveraged. Its employees own a substantial interest in the firm and their pay expectations are being managed with the best interests of the firm in mind. Jefferies has successfully hired talented individuals from troubled or failing firms and recently acquired a muni trading and underwriting business. Trading volumes have been good, their restructuring business busy, but their capital markets and mergers and acquisition businesses remain lethargic. This will inevitably improve, but timing is uncertain.
In 2000, Leucadia and Jefferies entered into a joint venture to trade high yield debt. We invested $100 million and received for the next seven years an average return of 20% per annum. In 2007, Leucadia and Jefferies formed Jefferies High Yield Trading, LLC (JHYT) a registered broker-dealer that engages in the secondary sales and trading of high yield and special situation securities. Each company has invested $350 million and has no current plans to invest more. In the midst of the financial meltdown JHYT survived pretty well by avoiding dangerous and highly leveraged situations and by remaining very liquid. Our return for 2008 was minus 20%. We hope for better results in 2009.
We have known Jefferies for a very long time and are particularly fond of and hold in high regard its long time Chief Executive Officer, Richard B. Handler. We believe that over the long haul Jefferies will survive and grow to enrich their shareholders!
AmeriCredit Corp. (ACF)
As of December 31, 2008, we acquired approximately 25% of the outstanding common shares of AmeriCredit Corp., a company listed on the NYSE (symbol: ACF) for aggregate cash consideration of $405.3 million. ACF is an independent auto finance company that is in the business of purchasing and servicing automobile sales finance contracts, historically for consumers who are typically unable to obtain financing; this segment of the business is known as subprime. At December 31, 2008, our investment in ACF is classified as an investment in an Associated Company and is carried at fair market value of $249.9 million.
Years ago we owned a similar business and as a result carefully followed ACF. We observed that their large volume and efficient processing and underwriting abilities made them a fierce competitor. We also observed that when a recession hit ACF went through a period of poor results, but when a recovery began they were able to make very large profits by being able to select more credit worthy customers and to charge more for loans.
Much of the above remains true; however, we began to buy the stock too soon and paid too much. The recession has been much harder and much deeper than we anticipated, though ACF is succeeding in acquiring more credit worthy customers and is able to charge higher rates. The fly in the ointment has been that it has been almost impossible to secure additional funding to make loans. Securitizations, which were the lifeblood of their financing, are in rigor mortis. The Federal Reserve has announced a program to restart consumer lending known as TALF, but as yet ACF has not been able to access it. Perhaps that will change. ACF has adequate financing to operate at a much reduced volume and is committed to preserving its net worth of $15.03 per share. We have a high regard for its management.
Apparently Leucadia has done business with Jefferies before. Ian Cumming and Joe Steinberg wrote in 2007 shareholder letter:
During 2007, Leucadia and Jefferies & Company, Inc. formed JHYH (Jefferies High Yield Holdings), a successor entity to JPOF II which returned 20% compounded annually for seven years. Our commitment to JHYH is $600 million of which $350 million has been funded. JHYH operates in every corner of the high yield market (but no sub-prime mortgages) and has thus far escaped harm, though our share of 2007 earnings was just $4.3 million. For the time being JHYH is hunkered down and has weathered the storm. Thanks to Rich Handler, Chairman and CEO of Jefferies.
What is their view of the recession and what are they doing? They wrote:
Out of prudence we have a pessimistic view as to when this recession will end. To think otherwise would be to gamble about the beginnings of good times whereas by imagining a bleak future we will most likely survive for the good times to arrive… The reality is we will continue to look for companies to buy, but only consider companies that earn money, have a bright future and are durable! In these troubled times there are sure to be good opportunities for investment and we will remain on the hunt. We can recognize a good deal when we see one and will strive to execute. We intend to resist what we consider “financial bets.”