An Activist Could Push 'Other Berkshire Hathaway' To Sell Beef Unit

Leucadia National Corp. (LUK) , once known as "the other Berkshire Hathaway" is considering strategic options as it continues to shift its focus towards investment banking.

For analyst Chris Kotowski, at Oppenheimer & Co., that means the mostly financial firm could soon sell its second largest subsidiary, National Beef Packing Co. LLC.

"We believe that management will likely use this industry up-cycle to sell National Beef," said Kotowski. "They have investor days every October and I've been to the last two and they plainly said that they are considering their strategic options, so they have not made any secret about it. 

However, if a sale isn't forthcoming an activist hedge fund could target the company, which has a $10 billion market capitalization, to push it into striking a deal. Activists often push companies with a goal of forcing a sale or spin off, with the goal of driving share price value. An activist fund could seek to pressure Leucadia to use proceeds from a sale towards stock buybacks or dividends. Alternatively, activists often drive companies to spin off divisions they believe hold value hidden within a larger conglomerate's overall valuation. A National Beef spin off could generate a new publicly-traded company for Leucadia shareholders.

Kotowski suggests that National Beef could be sold for between $1.2 billion to nearly $2 billion. A $1.2 billion valuation could be obtained by considering the company's cost structure, he added. Alternatively, when considering comparable deals, National Beef could come closer to a $2 billion valuation in in a sale, he added. Leucadia acquired National Beef in 2011 for $875 million. It owns 79% of the beef processor, which is headquartered in Kansas City, with the rest owned by management and other investors.

A sale of National Beef would also fit within a possible move to transform Leucadia into an investment bank with a merchant banking capability. Leucadia already started down a path of divestitures around the same time that it consummated its $3.7 billion 2012 acquisition of investment bank Jefferies Group. When the deal closed, Jefferies CEO, Richard Handler, became CEO of both companies. Leucadia, which had previously been known as "the other Berkshire Hathaway" at the time had holdings ranging from energy and lodging to timber and finance.

However, with Handler in charge, Leucadia began making divestitures. Most recently in 2016 it sold Conwed Plastics LLC, a company the conglomerate had owned for roughly 30 years, for $295 million. In 2013, Leucadia stopped funding Sangard, a biotech company that it had provided capital for research and development. In recent years it also had shed its remaining stakes in Australia's Fortescue Metals Group Ltd. for $152.9 million and Mueller Industries Inc., a metal tube manufacturer, for $427 million.

Oppenheimer's Kotowski argues that an IPO of National Beef is a possibility, though he believes Leucadia would prefer to sell the business. Potential buyers for National Beef include Tyson Foods Inc. (TSN) , Brazil's JBS SA or Cargill Inc., a privately held large player in the agricultural, livestock and processed-food markets.

However, it's also possible Leucadia is looking to find a buyer for National Beef from China. A Chinese-based acquisition would come after China-based Shuanghui International Holding Ltd's $7.1 billion 2013 takeover of pork producer Smithfield Foods Inc. (SFD) , a deal that raised some eyebrows in Washington. "I suspect they are also looking to China," Kotowski said.

That deal came under a long review by the U.S. Committee on Foreign Investment in the U.S., an interagency regulator that reviews cross-border deals for national security risks. It was approved with no strings attached. Nevertheless, in its wake some lawmakers are seeking to have CFIUS authority expanded to consider food safety as a consideration. A Chinese company's acquisition of National Beef would likely be met with concern among lawmakers and some Trump Administration members of CFIUS.

A Leucadia spokesperson declined to comment.

Editor's Pick: This article was originally published on July 5.

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