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Jefferies Sells Stake After Miss

The regional brokerage firm swung to a loss and agreed to swap stock and cash for Leucadia shares.

Updated from 12:04 p.m. EDT

Jefferies Group

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on Monday sold a nearly 14% stake of the regional brokerage to

Leucadia National


, after missing first-quarter expectations by a long shot on trading and asset management losses.

New York-based Jefferies will exchange $100 million and 26.6 million, or 13.7%, of its shares for 10 million shares of Leucadia stock. The diversified industrial business also will take two board seats on Jefferies' board. Leucadia stock closed at $53.86 on Friday, while Jefferies closed at $14.98.

Jefferies executives on the conference call characterized Leucadia, which makes wood products, sells prepaid phone cards, owns a Hard Rock Hotel and Casino and develops medical products, as an "important banking client" with whom the firm has "done a lot of work." Jefferies Chairman and CEO Richard Handler, on a conference call with analysts, said the deal "would give Jefferies control over its own destiny."

"Although our balance sheet and liquidity are solid, in light of the general environment and recent events, we believe it is prudent to strengthen further our foundation as we look to take advantage of the many opportunities we see in the current market environment," said Handler in an earlier statement.

Jeffries unveiled the move as it reported a loss of $60.5 million, or 43 cents a diluted share, vs. a profit of $62.3 million, or 42 cents a diluted share in the year-ago period. Analysts had been expecting a profit of 12 cents a share, according to Thomson Financial. Net revenues plummeted 52% to $201.2 million as compared to the 2007 first quarter revenue of $418.8 million.

Jefferies shares were recently trading up 4.1% to $15.59. The firm also declared a dividend of 12 and half cents.

Analysts on the call pummeled Jefferies management with questions about the complexities of the Leucadia transaction and why Jefferies was handing over $100 million to Leucadia. Jefferies conceded that Leucadia drove some of the terms of the deal and while they didn't desperately need the capital, they valued Leucadia's stock and wanted "a strategic partner that was heavily involved."

Leucadia is considered a holding company and its businesses are not necessarily strong in this market environment.

The rotten quarter was blamed on a $51 million loss in Jefferies High Yield Trading and a $34 million loss in Jefferies Asset Management. Those losses combined with the investment bank division that only pulled in $99 million in revenue.

The firm also disclosed that it had closed several funds and reduced its capital at risk from over $400 million in the fourth quarter to $250 million in the first. Unwinding the funds at a time when there was no market for the product contributed to the losses. Jefferies will only run its passive index funds and some commodity strategy funds instead.

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"This quarter reflected a period we would like to forget," Handler said in the call.

Jefferies expects another 15% in severance costs for the next quarter as it has so far reduced head count by 8%.

Jefferies stock has lost 50% of its value over the last year.

Standard & Poor's analyst Matthew Albrecht recently noted credit market turmoil has hit the firm's fixed-income and asset management businesses. Albrecht has a 12-month $20 target price and a hold rating on the stock.

"Because of the difficulty of raising capital in this environment to get deals done, we anticipate a significant impact on investment banking results as well," Albrecht wrote in a note. "We look for a steep decline in net revenues for 2008 before a rebound in 2009."

The company said it saw no need for writedowns and said that in the first few weeks in April, they had made money. Executives say

JPMorgan Chase's

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purchase of

Bear Stearns


, a competitor for deals, may provide a spark to the business.

Management also noted that the larger banks have their own problems to distract them and that may help Jefferies as well.


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Merrill Lynch


last week reported losing quarters and huge writedowns.