Leucadia Sinks $350 Million Into Staggering Finova

Commercial lender Finova (FNV) got a small shot in the arm Monday as insurer Leucadia (LUK) agreed to invest up to $350 million in the troubled finance company.

While the deal will provide some much-needed stability for Finova, some analysts believe it comes at too high a cost.

Under the deal, Leucadia will buy 10 million new Finova convertible preferred, pay-in-kind shares for $250 million. In June 2006, the shares will be convertible into 100 million common Finova shares. Finova will also issue an additional $100 million of the PIK issue, and Leucadia agreed to be a standby purchaser of those additional shares. This guarantees Finova will receive at least $350 million in financing and up to $400 million in equity capital.

"There is a huge amount of dilution in the deal. They are essentially giving away 75% of the company to get this capital infusion," says Michael Vinciquerra, analyst at Raymond James. "It solves the near-term issue in that it puts them back on firm ground in the balance sheet, but it comes at a pretty steep cost." (He upgraded the stock to market perform from underperform Monday, and his firm hasn't done any underwriting for Finova.)

Poppin' Fresh

Finova's shares initially popped more than 20% on this morning's news but were lately up just 13 cents, or, 4.9%, to $2.69. The stock has plummeted more than 90% since March, when signs of trouble surfaced, including a $70 million writedown for a loan to an unidentified computer distributor and the abrupt resignation of CEO Samuel Eichenfield. In May, Finova hired Credit Suisse First Boston to help it explore a possible sale. Then, earlier this month, Finova hired another consulting firm to help divest it of certain businesses, a sign to many that no one wanted to purchase the company wholesale.

As if that wasn't enough for one company, the stream of problems continued in August as Moody's Investors Service chopped Finova's senior debt rating to junk (noninvestment grade) status, sparking another selloff. Last Friday, the company said it would suspend its dividend, a move the company said would save about $11 million a quarter and improve liquidity. Finova's delayed third-quarter earnings are due out tomorrow.

Finova's latest agreement also gives Leucadia the right to appoint six members to a newly constituted 10-member board. Also, Finova agreed to issue a 10-year warrant allowing Leucadia to buy up to 20% of outstanding shares for $125 million. Vinciquerra notes the recent capital infusion could mean a boost in the company's debt rating.

Still, investors are likely to hold their applause on this deal for a while as Finova gears up to meet $1.6 billion in debt that comes due in May. And Leucadia's track record on acquisitions will likely keep some investors on the defensive. In July, Leucadia backed off a proposed $293 million purchase of belaguered Reliance Group Holdings (REL), a move that has left the struggling insurer on its own as it attempts to stave off bankruptcy.

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