Leucadia & Fortescue Enter Deal

Zacks

In a move to settle all claims and litigations, Leucadia National Corporation (LUK) recently entered into an agreement with Australia-based iron ore producer, Fortescue Metals Group Ltd. The deal had other parties including Fortescue’s subsidiary, Chichester Metals Pty Ltd and its one-third owner and founder, Andrew Forrest.

As per the terms of the agreement, the world’s no. 4 iron ore producer will be redeeming its royalty notes, issued in 2006 and currently held by one of Leucadia’s subsidiary for $715 million. Leucadia anticipates recording $526 million of pre-tax gains from the settlement.

Back in 2006, Leucadia had purchased $100 million worth unsecured notes issued by Fortescue in lieu of 4% revenue share payment from the latter’s two mines until maturity in August 2019. However, due to risk of value dilution of the notes from Fortescue’s plan to build a series of new mines, a railway and port facilities, Leucadia sued Fortescue and Forrest in 2010. This deal is expected to settle all litigations between the two parties.

Leucadia has been reducing its stake holding in Fortescue Metals Group Ltd. by selling off its shares since 2011. Finally in July 2012, the company sold off its remaining stake in Fortescue for net cash proceeds of approximately $152.9 million. The company anticipates recording $125.8 million in net securities gain in the third quarter of 2012.

Leucadia engages in manufacturing oil and gas drilling services, gaming entertainment, real estate activities, medical product development operations and various other activities involving investments in the United States.

The current Zacks Consensus Estimate for the third quarter of 2012 is 42 cents, representing a annual growth of 135.3%. Estimates for 2012 and 2013 are $3.35 and $1.68, representing a year-over-year growth of 4685.7% and decline of 49.9%, respectively.

We currently maintain a Neutral recommendation on Leucadia. The company's prime competitor Apollo Investment Corporation (AINV) currently bears a Zacks #3 Rank (Hold) while The Blackstone Group (BX) holds a Zacks #4 Rank (Sell).
 

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