Leucadia National (LUK)

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Seung Kon Lee

Andrew Lewis

Frequently called a "miniature" Berkshire Hathaway, Leucadia is a diversified stock-holding company which specializes in investing in businesses that are either distressed or poorly managed. Its core strategy is to buy assets when their prices are low and sell them after their prices rise. Leucadia's portfolio covers mining, manufacturing, communications, leisure, gas, medical production, and real estate industries. ^[1] Leucadia has experienced relatively persistent growth over the years. Though Leucadia hasn't been absolutely immune to the 2007 Credit Crunch and 2008 Financial Crisis, Leucadia was able to avoid the worst of the financial crisis compared to its competing companies by winding down its lending activities by 2004.^[2] Leucadia has a diverse portfolio which includes iron and copper mines, lumber and plastic manufacturers, a prepaid calling card provider, a hotel and casino, wineries, an oil and gas contract driller, energy production facilities, medical product developers, and other real estate interests.^[3]

Business Overview

Leucadia has a diverse portfolio which includes iron and copper mines, lumber and plastic manufacturers, a prepaid calling card provider, a hotel and casino, wineries, an oil and gas contract driller, energy production facilities, medical product developers, and other real estate interests.^[4]

Business Segments^[5]

Leucadia shares holdings in the following businesses.

Manufacturing (20.1% of total revenue)

• Fortescue Metals Group Ltd. (FSUMF) ^[6] is an iron ore mining company based in Australia traded on the Australian Securities Exchange (ASX: FMG).
• Cobre Las Cruces beholds Leucadia 's copper mining operations through the acquisition of MK Gold and association with Inmet Mining Corporation (TSX: IMN).^[7]
• Idaho Timber ^[8] is engaged in the manufacture and distribution of various wood products.
• Conwed Plastics^[9] manufactures and markets lightweight plastic netting for a variety of purposes and is a market leader in the sale of products used in carpet cushion, turf reinforcement, erosion control and packaging

Telecommunications (38.1% of total revenue)

STi Prepaid^[10] is a facilities-based provider of long distance wireline and wireless telecommunications services headquartered in New York.

Property Management and Services (10.5% of total revenue)

• ResortQuest^[11] manages vacation rentals for the owners of 7,766 units.

Gaming Entertainment (9.3% of total revenue)

• Premier Entertainment Biloxi is the parent company of the Hard Rock Biloxi^[12] which owns the Hard Rock Hotel & Casino in Biloxi, Mississippi.
• Pine Ridge Winery^[13] is located in Napa Valley, California.
• Archery Summit^[14], also a winery, is situated in the Willamette Valley of Oregon.

Oil and Gas Drilling Services (5.4% of total revenue)

• Goober Drilling provides services to oil and natural gas exploration and production companies in the Mid-Continent Region of the U.S., primarily in Oklahoma and Texas.
• Louisiana Gasification Project, a petroleum coke gasification operation at the Port of Lake Charles located in Lake Charles, Louisiana is financed through Leucadia's subsidiary and beneficiary, Lake Charles Cogeneration LLC.
• Liquefied Natural Gas operations which are to be located on the Skipanon Peninsula in Warrenton, Clatsop County, Oregon are executed through leasehold interest and permits obtained from Calpine Corporation (CPN).

Medical Product Development (0.5% of total revenue)

• Sangart11^[15] is a biopharmaceutical company that has been working for many years developing an oxygen transport agent as a substitute for whole blood.
• Chakshu12^[16] is currently developing prescription eye drops to address the symptoms of early stage cataracts.

Domestic Real Estate (2.7% of total revenue)

The company's real estate properties are valued at $225.4 million.

Other Operations (4.8% of total revenue)

• Leucadia is involved in the share holdings and/or acquisitions of Australian Securities Exchange FMG common stock, Jefferies High Yield Holdings (JHYH), Pershing Square IV, AmeriCredit (ACF), Highland Opportunity Fund L.P., HFH ShortPLUS Fund, L.P., RCG Ambrose, L.P.

^[5]

Key Trends and Forces

With the expirement of contracts nearing, chief officers Ian M. Cumming^[17] and Joseph S. Steinberg^[18] face resignition at 2015 without sufficient successors, stemming managerial risks

The recruit of new executives to make up for the loss of former ones due to the expiration of contracts and retirement is not a new trend that businesses face. Leucadia, faced by this obstacle as well, is currently dependent on key personnel, Chairman of the Board Ian M. Cumming, and President Joseph S. Steinberg. Both of whose contracts are to expire by June 30, 2015, are not only the largest stockholders of the company, sharing approximately 11.3% and 12.5% of Leucadia 's outstanding common shares, respectively, but are also essential to all of Leucadia's operations.^[19] Dating back to the early developing stages of Leucadia in the 1970s, the history of Leucadia is indivisible with these two executives. Leucadia faces the inevitable managerial task of not merely finding successors for these two, but finding successors who will mount to the level of dedication and performance which Mr. Cumming and Mr. Steinberg have exercised over the years. Consequently, this issue arises as a big risk for Leucadia's future.

Demand for Energy

Competition

Competition for Leucadia comes from publicly-traded equity firms. Many of these firms include business development companies, such as American Capital Strategies (ACAS), Ares Capital (ARCC), and Allied Capital (ALD).

• American Capital Strategies (ACAS)^[23], with $17 billion compared to Leucadia's $8.1 billion^[24] in capital resources under management, is a private equity fund and alternative asset management company regulated under the Investment Company Act of 1940.^[25].

• Ares Capital (ARCC) ^[26], in contrast with Leucadia's diversified portfolio, is a closed-end, non-diversified, specialty finance company that is regulated as a business development company under the Investment Company Act of 1940.^[27]

• Allied Capital (ALD),^[28] another business development company and investor in the private equity industry regulated under the Investment Company Act of 1940.^[29]

References

1. ↑ LUK 2007 10-K pg.1
2. ↑ LUK 2004 10-K
3. ↑ LUK 2007 10-K pg.1
4. ↑ LUK 2007 10-K pg.1
5. ↑ ^{5.0 5.1} LUK 2009 10-K pg. 6  
6. ↑ Fortescue Metals Group Ltd.
7. ↑ Inmet Mining Corporation
8. ↑ Idaho Timber
9. ↑ Conwed Plastics
10. ↑ STi Prepaid
11. ↑ ResortQuest
12. ↑ Hard Rock Biloxi
13. ↑ Pine Ridge Winery
14. ↑ Archery Summit
15. ↑ Sangart11
16. ↑ Chakshu12
17. ↑ Ian M Cumming has been the Chairman at Leucadia since 1978. He has been the Chairman at FINOVA since 2001. Mr. Cumming has been a Director at Skywest, a Utah-based regional air carrier, since 1986 and a Director at HomeFed since 1999. He is also a Member of Premier's Board of Managers since 2006. Mr. Cumming is an Alternate Director at Fortescue.
18. ↑ Joseph S Steinberg has been the President at Leucadia since 1979. He has been a Director at the company since 1978. In addition, Mr. Steinberg has served as a Director at JII since 1988, HomeFed since 1998 (Chairman since 1999) and FINOVA since 2001. He is a Member of Premier’s Board of Managers since 2006. Mr. Steinberg has served as a Director at Fortescue since 2006.
19. ↑ [http://www.sec.gov/Archives/edgar/data/96223/000009622308000015/lnc200710k.txt LUK 2007 10-K pg.21
20. ↑ Energy Information Administration
21. ↑ LUK 2008 10-Q3
22. ↑ Energy Information Administration
23. ↑ ACAS 2008 10-K
24. ↑ LUK 2007 10-K
25. ↑ 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a-64
26. ↑ ARCC 2007 10-K
27. ↑ 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a-64
28. ↑ ALD 2008 10-K
29. ↑ 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a-64