This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Leucadia to the Rescue After Jefferies Rescued Knight Capital

NEW YORK (TheStreet) -- When trading firm Knight Capital (KCG) needed a rescue in August, it called Jefferies (JEF) to arrange a last minute deal with a handful of investors.

Now, only a few months later, Jefferies is getting its own capital injection by way of a sale to Leucadia National (LUK), which values the struggling investment bank at roughly $3.6 billion.

The Monday morning merger with Leucadia National isn't the last minute call for capital that put Knight Capital into the hands of Jefferies and a handful of other investors, however, the low price of the deal signals Jefferies was in need of a balance sheet injection to withstand a bleak Wall Street outlook.

In the merger Leucadia National - it's already a 28.6% shareholder in Jefferies - will offer 0.81 of its shares for each outstanding Jefferies share in a stock deal that's valued at roughly $3.6 billion as of Friday close.

After the deal is completed, Jefferies chief executive Richard Handler will become CEO of the combined companies and Jefferies will be Leucadia's largest business among a span of operations that give it the moniker of being a mini Berkshire Hathaway (BRK.A).

A press release announcing the deal keyed in on capital and the $9 billion in shareholder equity that the combined companies will now have.

Leucadia's co-founder Joseph Steinberg will become chairman of the combined company and Ian M. Cumming, another co-founder, will retire but remain a director.

Jefferies' merger with Leucadia comes at a time when the firm's investment banking and trading units face pressure from by a weak economic outlook, the burden of expansion efforts and new regulations that make it more costly to do business.

Meanwhile, Jefferies status as an independent Wall Street dealer a fraction the size of competitors like Goldman Sachs (GS) and Morgan Stanley (MS) caused ratings agencies like Moody's and independent analysts to downgrade the firm's bond ratings just above investment grade levels that are crucial to survival.

Just over a year ago, trading firm MF Global filed for bankruptcy after an outsized position in European government bonds caused ratings agencies to question the firm's capital and cut its bond ratings to junk. In the aftermath of MF Global's demise, investors and some analysts questioned whether Jefferies would be next.

While the Monday deal staves off any lingering comparison to MF Global, it gives new evidence to the struggles gripping Wall Street, as even large players like UBS (UBS) exit key trading areas.

For Jefferies employees, the deal may be a relief. On a conference call with analysts, Jefferies CEO Handler said business is expected to be as usual at the investment bank on Monday and there are no expected layoffs to go with the merger. Meanwhile, all Jefferies employee stock grants will convert to Leucadia units at the terms of the all-stock transaction.

A key part of the deal is the assumption that the ongoing profitability of Jefferies will create the earnings to utilize a large net operating loss held on Leucadia's balance sheet, converting it into capital that could bolster future trading and banking business.

According to Leucadia's third quarter filings with the Securities and Exchange Commission, it would need to generate $4.4 billion in pre-tax income to fully realize the deferred tax asset created its NOL's. Leucadia's financial statements go on to say that its NOL carryforwards will be available until 2029.

In 2011, Jefferies earned $419 million in pre-tax income, and the firm has already earned roughly $400 million in pre-tax income through the first three quarters of 2012. Per a joine presentation released on Monday, Jefferies has earned $1.73 billion in pre-tax income since 2009.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,083.80 -2.83 -0.02%
S&P 500 1,987.98 +0.97 0.05%
NASDAQ 4,472.1080 -1.5890 -0.04%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs