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.
Amen to both points. They overpaid for National Beef, and then way overpaid for Jefferies, and then the management team and comp committee doled out huge "performance bonuses" for eroding LUK shareholder value.
Amen to that. I'm a suffering long-term shareholder. In hindsight, it's becoming clear that Cumming and Steinberg used LUK as a "personal piggy-bank" over the last few years of their tenure. For every good, big deal that translated into a major "performance bonus," there was a bad deal that was ignored by the compensation committee.
The good news is that Team Handler has already demonstrated more sensitivity to shareholder returns. We'll see whether that trend continues. I've always said that I'll give Team Handler three years, before making a decision to start reducing my LUK position.
Ugly, but the whole sector is selling off. FLY just feels worse, because it's starting from a lower base (self-imposed, due to the SO).
Most important is the fact that they are not subject to Big Bank Regulation under Dodd Frank. JEF can perform certain services for clients that the Big Banks cannot. And LUK/JEF can seed investment management firms, etc., while the Big Banks are exiting that line of business.
I saw Besterman's theory, and I don't think it's about upsizing leverage. I think it's the general advantage of having critical mass but staying nimble without the Regulatory Suffocation (costs, time drain, etc.) imposed by Dodd Frank.
I agree -- I was fortunate to allocate some capital to HOFD during the financial meltdown (HOFD sold off massively). In my view, HOFD has significant upside. A big limitation has been the lack of liquidity. Not sure how they address that, other than a secondary offering, if HOFD needs the capital.
Long thread. I agree, LUK has seriously disappointed its shareholders over the last five years. Meanwhile, LUK management paid itself fairly ridiculous bonuses with respect to its good deals, not netting against the bad (deals).
However, LUK is a very different animal after the JEF merger. Better/worse? Time will tell. But you can't compare Team Handler to Team Buffett. Team Handler only has a transition year under its belt.
I didn't take notes, but I listened to the call and just posted some observations (from memory, so bear with me, because my memory goes foggy in about 6 minutes these days).
I'm a long, long time LUK shareholder. I'm skeptical about the "new conglomerate" model, but I'm patient. Despite my skepticism, I was very impressed by the call.
I continue to hope (i) Team Handler sells the smaller, legacy businesses -- to enhance focus on Jefferies and the other larger businesses, and (ii) if the share price continues to struggle, Team Handler and the Board pursue a stock-buy back strategy.
On the latter point, Handler (or someone) mentioned that they view stock buy backs opportunistically in connection with market dislocations. So I'm not holding my breath.
- National Beef. The CEO described the current business. Despite the challenges facing the business, he's confident in the business model and believes that they'll participate and flourish in the next upcycle. [Someone asked about Walmart. He said that Walmart terminated the relationship because Walmart wanted to source all its proteins (beef, chicken, pork) from a single vendor or vendors. They've been re-positioning the business, e.g., by focusing on the tannery operation.] Overall, the story sounded better from the CEO than on paper.
- Vitesse Energy. The CEO described the business, which is basically looking to manufacture oil out of highly de-risked plays in the Bakken. In theory, it's a relatively low risk, quick payback business model. [Someone asked how they can maintain such high returns as effectively a financial investor. The CEO danced around the question -- whether intentionally or not. Friedman (or someone) jumped in -- to me, it sounds like the Vitesse management team is adding value by identifying the lowest-risk, highest-return inventory for oil production.]
- HomeFed. The CEO described the business, some focus on the legacy business, minor focus on the newer assets recently acquired from LUK. LUK wants to elevate HomeFed to the big leagues -- not a few hundred shares trading daily. It sounds like a solid enough business, highly cyclical and now participating in the real estate upcycle. [Someone asked about the fairness of related-party transactions between LUK and HOFD. Team Handler has a process, etc.]
- Linkem. The CEO was describing the business when I had to jump. Sounded like "old school" LUK to me; very long-term development opportunity with huge upside. For me, similar to National Beef, you get some positive color listening to the CEO live.
- I missed the discussion (if any) of Conwed, Idaho Timber and Lake Charles / Oregon LNG. I'm very skeptical about the latter two businesses -- expecting "dry holes."
I listened to most of the call today. I had to jump to another meeting a little after 9am -- during the presentation from the LinkEm CEO, which was interesting. I was listening and multi-tasking, so I don't have precise notes.
If you haven't seen it, you should pull up the investor presentation -- SEC Form 8-K. It has a very helpful organizational chart. Team Handler sees LUK as part "Financial Services" (JEF, LUK asset management, Berkadia) and part "Merchant Banking."
Very interesting -- either Handler or Friedman (or someone) mentioned that they expect to convert the $1.3 billion DTA into cash within the next 3-5 years. If so, that would be astonishing income generation during that period.
In terms of logistics, Handler and Friedman discussed the Jefferies business (including the "developing" asset management segments), and then the CEOs of the operating subs discussed their respective businesses.
- JEF etc. Nothing too new or exciting here. Team Handler believes that they have a unique platform and strong group of players. They made some big investments during the financial crisis, and those investments are bearing fruit. They are expanding the asset management business by investing in managers (and management companies), rather than doing M&A deals that would create goodwill -- they believe everything is highly or fairly valued. [No great questions from the audience/phones. Someone asked -- if the share price continues to struggle two/three years out, would they get more aggressive on stock buybacks. No meaningful response.]
- Berkadia. Justin Wheeler is temp CEO and discussed the business. Berkadia has been growing and "re-branded" -- Wheeler/LUK are very bullish on the future of the platform. [No meaningful questions.]
- More to come...