I guess the market didn't like this deal. LUK edging towards a one-year low.
(Just kidding...obviously not because of this deal.)
That's good news! My wife and I did a food and wine (5x5) tasting at Pine Ridge a couple weeks ago. The wines were awesome (!), including a couple 2012 vintages. We utilized our 20% shareholder discount and purchased a bunch. If you have a chance, I definitely recommend a visit to the tasting room / headquarters. As a shareholder, it underscored (i) the value of the acreage in Napa, and (ii) the extra value that Pine Ridge (Crimson) has created beyond the value of the acreage itself. For example, the underground "caves" that Pine Ridge has created by dynamiting out the bedrock.
I don't know for sure, but seems unlikely. Homefed is a developer, so I don't see a logic to transferring "mature" car dealership leases. LUK has always reported Garcadia as a distinct business unit, while its real estate development assets were lumped into an "other" category.
I'm looking at the SEC files. On November 1, 2013, Cumming sold 4.2 million shares at $28.05. Before the transaction, he owned ~ 22.6 million shares. After the transaction, he owned ~ 18.3 million shares. The filing that reports his sale notes that he is no longer a 5% owner, and will no longer be required to report sales of LUK stock. (No more Schedule 13D reporting.)
Pretty interesting. It seems like this was primarily motivated by a desire to avoid further SEC reporting requirements. However, if you thought that LUK was seriously undervalued, would you sell shares at $28 to avoid SEC reporting requirements? Interesting...
I just realized ... LUK has a new shareholder letter on the website. LUK apparently posted it on February 28th (probably accompanying the Annual Report / 10-K).
The first letter from Handler and Friedman. Nothing too exciting. They did confirm that LUK is focusing on the Lake Charles and Oregon LNG opportunities. Seems like Indiana and Mississippi are effectively dead. A few insights on the other businesses. Generally, optimistic tone. Hopefully, we see that translate into improved financial performance in 2014.
Main, it's been awhile. You've gotten a bit pessimistic lately!
Remember, Barrington is a BBAM employee and thus a "figurehead" CEO. The Board is ultimately responsible for the Onex deal and the dilutive stock offering. There is a significant conflict of interest between FLY's shareholders and its "outsourced" manager (BBAM). The Board went precisely the wrong direction with the Onex deal. It should have been looking to internalize management -- just like the other public aircraft lessors. Instead, the Board pushed towards a full "outsourcing" model, which the market views in low regard. The relative performance of the aircraft lessors speaks for itself.
(Unfortunately, FLY is still one of my largest positions by cost basis. But FLY led me to AER, and that investment has been terrific.)
At the corporate level, regular NOLs can offset capital gains (as well as ordinary income). However, capital loss carryovers can only offset capital gains. In LUK's case, my understanding is that the NOLs are regular NOLs (not capital losses).
Another datapoint. LUK has a large amount of NOLs that can be used to shield future income. One benefit of the JEF deal, in theory, is that LUK's NOLs could offset JEF's income (and thus "convert" the deferred tax asset on LUK's balance sheet into cash for the benefit of shareholders).
At 12/31/12, LUK reported a net DTA of $1.215 billion. The "net" DTA is comprised of gross deferred tax assets [approx $1.362 billion], net of deferred tax liabilities [approx $0.147 billion]. Within the "gross" DTA, LUK reported NOL carryovers of $1.333 billion.
At 12/31/13, LUK reported a net DTA of $1.810 billion. Within the "gross" DTA, LUK reported NOL carryovers of $1.284 billion. So LUK "converted" approximately $50 million of the DTA into cash during the year. At a 40% tax rate, that implies approximately $125 million in taxable income [$125 million times 40% ETR = $50 million].
NOLs expire after 20 years. At the 2013 pace, LUK's NOLs will start expiring before utilization. However, LUK must have convinced the accountants that it will be able to use the NOLs. Otherwise, it would have to record a valuation allowance against the NOLs.
LUK added a $400 million DTA associated with "compensation." I'm perplexed by the source of this entry. It implies compensation awards of approximately $1 billion [$1 billion times 40% ETR = $400 million tax benefit]. Perhaps this is a combination of 2013 bonuses paid in Q1 2014 (a big number) and equity-based comp.
Another lousy quarter. Tough first year for Team Handler. Notes from 10-K (numbers 12/31/13 unless indicated). NBV = net book value; PTBI = pre-tax book income.
- JEF: NBV $5.3 billion; PTBI $261.0 million; generated $750.1 million cash from operations (although I'm not sure if that includes or excludes bonuses paid in Q1 2014) ... comp was 56.9% of revenues after the JEF merger
- National Beef: NBV $793.7 million; PTBI $(42.3 million) (loss includes $63.3 million impairment of Brawley, CA facility, which will be mothballed effective April 2014)
- Idaho Timber: NBV $68.1 million; PTBI $9.6 million
- Energy projects: expensed $91.7 million in 2013 (up from $33.6 and $34.0 million in 2012 and 2011, respectively); Lake Charles sounds promising; the others do not, in my opinion
- HOFD: carrying value was $52.9 million at 12/31/13 (owned 31.4%); just announced new deal with HOFD where LUK contributed real estate assets with BV of $178.5 million for 7.5 million shares worth ~ $285 million (based on HOFD price of $38/share) (LUK will own 65% when dust settles, can only vote 45%)
- Berkadia has been very solid: original 2009 investment $217.2 million; NBV $182.6 million; cumulative cash distributions $229.7 million
- Garcadia: JV carrying value $120.0 million; cash distributions to LUK $33.1 million in 2013 ... land/leases carrying value $77.2 million; rental income to LUK $7.1 million in 2013
- Linkem: NBV $173.6 million on original cash investment of $219.6 million
- Selling Hard Rock Biloxi for $250 million (old news), now disc ops
- Sold 9.95 million First Quantum shares for $184.7 million cash during 2013.
- Repurchased 312k shares in connection with equity comp plans. No shares under Nov 2012 general share repurchase authorization (25 million).
- LUK shares have been crushed by the S&P 500 and S&P 1500 over the past five years.
- BV/share increased from $27.67 at 12/31/12, to $27.71 at 12/31/13.
- Favorably refinanced various debt tranches during 2013.
Interesting. LUK exchanged cash and assets with a book value of $178.5 million for 7.5 million HOFD shares worth approximately $285 million (at $38.00/share, today's closing price) (2/28/14).
Either LUK realized a big gain, or HOFD shareholders just got severely diluted. I'm both a LUK shareholder and a HOFD shareholder, so I'm hoping for the former.
Very interesting. But makes sense -- I believe that JEF historically did earnings calls. Not 100% certain, but that's my fuzzy recollection.
February 11, 2014 – Reuters – The U.S. Energy Department on Tuesday approved exports from Sempra Energy's Cameron liquefied natural gas project in Louisiana as the Obama administration moves forward with its goal of expanding the global market for the fuel. The conditional approval of exports from the terminal to countries with which the United States does not have free trade agreements, such as India and Japan, was the sixth approval by the department since 2011, and the first since mid-November. Cameron's application to export up to 1.7 billion cubic feet per day brings total U.S. authorized LNG exports to almost 8.5 bcf feet per day, once the terminals are constructed and working at full capacity. The latest export approval confirms that the review process is becoming "largely depoliticized," said Leslie Palti-Guzman, a gas analyst for the Eurasia Group. The consulting firm predicted that permitting would "continue unabated through 2014." But some analysts cautioned that a pause in approvals could still be near as licensed export volumes near the threshold of 12 bcf a day considered in DOE-commissioned studies by the Energy Information Administration and NERA Economic Consulting. "We think a cautious agency may be unlikely to exceed the upperbound of the range of studied outcomes," ClearView Energy Partners said in a research note. After a nearly two-year pause in its review while studying the potential impact of exports on the domestic market, the administration resumed the permitting process in 2013. Since then the
gap between decisions on applications has been as much as three months or as little as five weeks. That uneven pace of approvals has frustrated both supporters and opponents of the LNG export push. Republican lawmakers, along with Democrats representing oil and gas producing states, have pressed for much quicker processing of the more than 20 applications that remain in the government's queue.
A couple developments:
1. Lake Charles Clean Energy (LCCE) has been awarded cost-share funding of $261.4 million from the DOE for a Louisiana plant that will convert petroleum coke, a refinery byproduct that is more than 90 percent carbon, to hydrogen gas, methanol and other products. Around 89 percent of the carbon dioxide will be captured and piped to the West Hastings oil field for EOR. Plant construction is expected to take around 3 years.
(More details available in the Federal Register. Search google for Leucadia Energy and DOE, filter to the last month.)
2. From American Press:
The [Lake Charles Port Board] also approved a resolution saying it will take the necessary steps to acquire about 80 acres of vacant property needed to move the $2.6 billion Lake Charles Clean Energy project forward.
Mike Dees, the port’s legal counsel, said the owners of the property include “more than 30 or 40 different individuals scattered across the country.” This makes it difficult to voluntarily acquire the land, which would be used to store the methanol produced at the Lake Charles Clean Energy plant. The board in August agreed to handle and store methanol for Lake Charles Clean Energy.
“We have been in touch with the current owners by letter, and they are aware of our interest in the property,” Dees said.
He said one property owner “who had a substantial interest” rejected an offer last year to voluntarily acquire the property. Since then, he said the port has completed two environmental studies and another appraisal. Dees said another offer will be submitted to the property owners.
The project is expected to generate 1,500 construction jobs and 200 permanent jobs.
Agreed, tangible equity is similar to pre-merger JEF equity. And the ROE looks better from that perspective.
Nonetheless, LUK paid a big premium for Team Handler (and control). That was a transfer of "value" from LUK shareholders to JEF shareholders. I don't know that it makes sense to exclude the goodwill when computing ROE. Alternatively, maybe this is just objective evidence that LUK overpaid for JEF.
This is not a full-blown analysis of the JEF business. Just some random nuggets from the Annual Report.
Net earnings for TTM was $241.3 million. Member's equity on March 1, 2014 (including purchase accounting for the merger) was ~ $4.8 billion. Member's equity on November 30, 2014 was ~ $5.3 billion. That includes nine-month earnings ($161.2 million) and a large contribution ($362.3 million). I didn't see any color on the contribution.
Based on those numbers, JEF's ROE for the TTM was ~ 4.8%. That's pretty sad -- compare GS at 10% TTM, which is down from 20% or more before the financial meltdown. I won't be a long-term shareholder if LUK's franchise business is running a sub 5% ROE.
Now, admittedly, JEF's ROE is "hurt" by the premium LUK paid in the merger. In other words, JEF's ROE was higher in pre-merger periods, because the premium/goodwill was not included in shareholder's equity (now member's equity). If JEF continues to run sub-5% ROEs, then LUK overpaid in the merger. Otherwise, we should see ROEs improving -- LUK "paid" for a business that could theoretically outperform its historical earnings profile. We'll see.
Big picture, I continue to worry that JEF's business is fundamentally stacked against shareholders / equity owners. The traders and bankers get paid to risk other people's money. If the traders/bankers are fat and happy at a 5% ROE threshold, then either (i) they have no incentive to do better, or (ii) they will increasingly take extraordinary risks -- throwing off the risk-reward balance of trading activities.
p. 75- JEF generated $745.2 million in operating cash flow during the last nine months (good), but only $351.0 million during the TTM period (weak).
p. 48- JEF expects to make cash payments of $576.3 million on January 31, 2014 related to compensation awards for fiscal 2013. So basically, it's paying out more cash than it generated during the nine-month and TTM-periods (paying based on unrealized gains).
Agree with Besterman. Tangible book is ~ $20.06/share. Is the big premium to tangible BV warranted? Let's see if Team Handler can grow tangible BV. We won't know for a couple years. Check back in late 2015 or early 2016.
The past weekend, my wife and I opened a bottle of the Pine Ridge 2004 Cabernet Sauvignon (Stags Leap District). It was *awesome* -- I definitely recommend if you can get your hands on that vintage. Got me excited to check out the Pine Ridge tasting room -- hopefully a 2014 outing.
I'm continuing to accumulate shares ... albeit slowly.