* Deal will strengthen Jefferies' balance sheet
* Leucadia will be able to use tax benefits
* Expected to close in Q1 2013
* Jefferies' shareholders will end up with 35 pct of
By Jed Horowitz and David Henry
Nov 12 Investment company Leucadia National Corp
said it will buy Jefferies Group Inc in a deal
that values the investment bank at $3.6 billion.
Leucadia, which has been called a mini Berkshire Hathaway
for its holdings ranging from real estate to mining,
already owns about 29 percent of Jefferies.
The deal is aimed at strengthening Jefferies' balance sheet
and bolstering investor confidence because of the company's
relatively high risk profile. The bank has been trying to turn
itself into a full-service investment bank instead of a niche
player that focused on areas like underwriting junk bonds.
But its balance sheet has held it back, particularly in
areas like trading. Moody's Investors Service downgraded
Jefferies in October to just a step above junk status, saying
its growth has added to its risk.
Under the agreement, Jefferies shareholders will receive
0.81 of a Leucadia share for each Jefferies share held, valuing
Jefferies at $17.66 per share, a premium of 24 percent to its
Friday closing price of $14.27.
The deal will provide Jefferies with "greater balance sheet
resilience" and allow it to better handle volatile markets, the
companies said in press release Monday morning.
The deal will also result in lower taxes on Jefferies'
profits by using income tax benefits Leucadia holds from past
operating losses in companies it owns, they said. Jefferies can
utilize the benefits because it consistently generates more
taxable income than Leucadia.
In no longer having to pay dividends, Jefferies also builds
cash to bolster its balance sheet and fund its trading, the
companies said. Leucadia said it will convert from paying an
annual dividend to the quarterly schedule currently used by
"This will allow us to play offense at Jefferies," its chief
executive Richard Handler said on the call. "It will allow
Lecuadia a way to invest its excess liquidity."
Jefferies' credit rating was cut on Oct. 16 to Baa3, one
notch above junk, or speculative grade, by Moody's Investors
Service. Moody's cited the investment bank's aggressive growth
strategy and increased challenges of operating an investment
bank in the face of capital market risks.
Moody's on Monday affirmed Jefferies' ratings and put the
junk-rated Leucadia on review for possible upgrade.
Jefferies shares jumped by 12 percent in early morning
Jefferies Chief Executive Richard Handler will retain his
title at the combined company. Leucadia Chairman and Chief
Executive Ian Cumming will retire.
The deal, expected to close during the first quarter of
2013, will leave Jefferies shareholders owning about 35 percent
of Leucadia's common stock.
With Leucadia's 29 percent of shares and another 11 percent
held by Handler and Jefferies President Brian Friedman,
shareholder approval is all but guaranteed and competitive
outside bids are "highly unlikely," JMP Securities analyst David
Trone wrote in a note to clients.
Jefferies was founded in 1962 in Los Angeles to trade large
stock orders for investors away from the New York Stock
Exchange. It evolved from a so-called third market firm when
Handler--who earlier traded junk bonds under Drexel Burnham
Lambert's Michael Milken--joined in 1990 to build its bond