Very depressing. Did we need more evidence that LUK overpaid for JEF? Start with $60m in goodwill and Bache write-offs.
Shocker. Net revenues were down more (36%) than compensation expense (35%).
And now we see why Ian Cumming has been dumping 40-years worth of LUK shares in a 12-month period.
Unfortunately, I'm inclined to agree.
The LUK conglomerate model is just not working. The "Old LUK" management team gorged on corporate resources, despite more strike outs than home runs. The "New LUK" management team, Team Handler, seems distracted by the conglomerate model. They should be focusing on the core JEF business, which had an immensely bad quarter.
Key highlights over the last two to three years? LUK overpaid for National Beef during a market top. LUK burned tens of million (hundreds of millions?) in pie-in-the-sky energy development schemes. LUK entered the oil market during another market top. Meanwhile, JEF overpaid for the Bache business and overpays its employees, to the detriment of LUK shareholders.
Notice a common theme? Virtually no alignment between senior execs -- who are rich, fat and happy -- and long-term shareholders. It's very easy to play with other people's money.
I agree with your overall sentiment. However, the "management team" from Old LUK has passed the baton to Team Handler at New LUK. I'm a frustrated long-term shareholder, but I still think you have to give Team Handler time to perform. The old management team had a couple home runs (and Fortescue may have been a grand slam). But they also overpaid on two of the later, big ticket deals (JEF and NB). (Because executive comp was linked to deal flow, senior management profited at the expense of shareholders.)
So again, I agree with your sentiment big picture. But you have to distinguish between the old management team and the new management team.
Now ... all that said ... the fact that Ian Cumming has so quickly exited his enormous LUK position, with his years of institutional knowledge, suggests that LUK shares are fairly valued at best. He must not have faith in Team Handler, to say the least. And he is implicitly acknowledging that Old LUK was overpaying to do mediocre deals and justify large comp deals for senior management (and deal guys).
Compare the performance of AER and FLY. You prefer the returns of a FLY shareholder to the returns of an AER shareholder? Different strokes for different folks, I guess. But the AER model has been more profitable for me.
You have just realized this? With due respect, we've been discussing that fact for about three years (maybe more)!
FLY exists to fund aircraft acquisition opportunities for BBAM. BBAM is private. BBAM's business model is originating and managing aircraft leasing transactions. FLY provides the capital -- it can go do dilutive share offerings if BBAM needs cash to expand its leasing portfolio (i.e., management fees and transaction fees).
Yes, FLY is taxable in Ireland, but don't confuse the tail (Irish tax status) for the dog (pool of capital for BBAM).
I saw your earlier post. Great catch; I've been meaning to go back and read the disclosure. It's a really important point; many shareholders and observers don't understand that FLY may be the goose that lays the golden eggs ... for BBAM.
Yes, agreed. This is a huge obstacle to a buyout. I don't think many people understand this, whether shareholders or observers.
There is certainly a tension from a BBAM perspective. BBAM wants to maximize its own profits; but it doesn't want to damage the FLY "brand" to the point that FLY becomes a complete laughingstock. (As opposed to partial laughingstock that we've witnessed for the past couple years.)
Re: management fees and origination fees, etc., the question is -- how much would it cost FLY to "internalize" the functions that BBAM provides? Someone -- with more time than me -- could probably do a rough comps analysis of the other lessors, and see how much of FLY's cost structure is attributable to the "external" manager, vs the competitors that have "internal" management, i.e., a standard corporate structure with full management/ops team.
The market hates the "outsourced" management model. In case you are rusty, FLY Leasing does not have an "internal" management and operations team. It owns an aircraft portfolio, but it outsources management to BBAM; and pays BBAM for management, operations and origination (e.g., transaction advisory) services.
This creates a huge conflict: BBAM is incentivized to strip out cash flows as management fees and transaction fees. Yes, BBAM and its owner have a stake in FLY. But they are still not completely aligned with FLY shareholders. Thus, they do stupid things. For several years, FLY's figurehead CEO complained that FLY shares were trading at a huge discount to book value (they were). Then, out of the blue, FLY did a secondary offering at a huge discount to book value. In effect, FLY management (BBAM) "validated" the market view that FLY shares should trade at a discount to book.
And that's where we've been, ever since. I'm still long, despite seeing some other shareholders/posters come and go. I still think the underlying business model is solid -- but at some point, the FLY board will need to "internalize" management if it wants to tackle the large discount attributable to the outsourced management model.
I agree that JEF is the value driver. The merger of LUK and JEF was effectively a "reverse merger," with JEF now the primary business within the group.
My big question is -- how does Team Handler translate the profitable JEF business into gains for LUK's shareholders? Clearly, the JEF traders and LUK execs will get paid for their efforts. Handler mentioned a "dual focus" of stabilizing EPS/cash flow streams, and increasing book value. They must intend to use JEF's net income to "invest" in pet projects on the "merchant banking" side of the fence. I worry that the sprawling conglomerate has too many different small tentacles. At some point, LUK is going to neglect the plastics business or lumber business -- why not monetize, and roll the capital into larger-scale investments? Or better yet, *gasp* ... return some capital to shareholders through stock repurchases?
LUK has performed miserably over the last 10 years. LUK execs and employees have been living large. I agree with your thesis on JEF, but I'm waiting to see how it translates into positive news for LUK shareholders. I've always viewed this as a 3-5 year "project" after the merger, but the clock is ticking.
Haha, another cranky, suffering long-term shareholder. :)
Come on, man ... the execs don't get big bonuses if they don't overpay for deals! The bonuses are driven off deal size!!
Vitesse Energy LLC has acquired non-operated oil and gas assets in the Williston Basin from EnerVest Operating LLC for a preliminary purchase price of $186.5 million.
Vitesse paid just under $10k/acre. I've been following some of the Bakken players (mainly Oasis and Emerald Oil). The Bakken acreage has pretty significant variability. Impossible to evaluate the Vitesse deal without seeing a map. By contrast, Emerald Oil just did a deal at ~ $3k/acre, but Emerald is an operator and will need to drill -- Vitesse is basically a financial investor, making a bet on oil prices.
Hopefully the price reflects the recent sell-off in oil pricing. I would hate to have seen them negotiate the deal 3 months ago, and close today -- with oil prices having sunk considerably.
That said, I guess this gets me some exposure to the Bakken. I'll be even more patient with respect to Oasis and Emerald.
I agree with your theme. However, one thing that I noticed recently. JEF has apparently been running stock-based compensation through the P&L (thus hitting the comp ratio). The stock-based comp relates to pre-merger awards, that were converted into LUK shares in the merger. JEF is no longer compensating its employees with stock-based comp. So theoretically, after these awards are vested in full -- next couple years -- the JEF comp ratio will drop.
Of course, stock-based comp is dilutive, so it should be in the comp ratio (although I believe that sometimes the reported numbers can be funky). My point is, I believe that we should be seeing an "organic" reduction in the comp ratio, as the non-cash, stock-based expenses run out in the next couple years.
Again, completely agree with your theme -- JEF's comp ratios have been out of whack.
Main, I agree that Onex probably wanted FLY/BBAM to raise capital. That bad decision was probably influenced by Onex. Of course, BBAM got in bed with Onex, for what that's worth -- it's not like Onex did a "hostile" acquisition.
I still think you put too much weight in the CEO's statements and actions. Again, Barrington is not a "normal" CEO. He's a figurehead CEO -- albeit with good industry experience -- he does whatever BBAM wants him to do. Not the other way around.
Anyway, bottom line, I don't see share repurchases happening until a serious market disaster -- if FLY were to drop in the $10 or lower range (probably lower).
I would love to see FLY repurchase shares, but it seems unlikely at this level. Maybe they would pull the trigger in the $10 range. Unfortunately, I believe that BBAM is biased against using capital to repurchase shares -- they want to use the capital to expand the fleet, and thus generate more management fees (and origination fees from deals). As you and I have kicked around, this is the fundmanental "anti-shareholder" flaw in the external management model.
Meanwhile, I nibbled at the $13 range. Obviously too early. Now I'll wait for another 10% drop before nibbling more ($11.60 range or so).
I'm not a CPA, but I'm in the M&A space. My understanding is that the rules have changed recently. Historically, companies had to test GW (and other assets) for impairment on a quarterly basis. If the DCF (or whatever) valuation didn't support the GW, then you have to take an impairment.
I believe that the rules have recently changed, to permit [some/all] companies to amortize GW over some fixed period. This change may only apply to small/private issuers. (You could probably google it. I'm too busy right now.)
I'm sure that Team Handler would argue that the forward-looking projections amply support the $1.7b GW number -- i.e., no impairment necessary.
If you include the DTAs (not garbage in my view), but exclude GW ($1.7b, virtually all Jefferies) and other intangibles ($999m, including ~ $240m from Jefferies), tangible book value is $20.88. To me, that's where LUK starts to look compelling.