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Leucadia Continues to Diversify - Purchase of Controlling Interest in National Beef Largest Initial Outlay Yet

|Includes: Leucadia National Corporation (LUK)

Leucadia National (NYSE: LUK), a conglomerate with interests in the timber, plastics, oil and gas drilling, gaming entertainment, real estate, medical products, investment banking, and brokerage services industries, will expand its holdings into the meat processing business. The company announced on 5-Dec-11 that it had entered into an agreement to acquire a controlling interest in National Beef Packing Company for approximately $868 million. The transaction is expected to close by the end of 2011.

While LUK is no stranger to diversification through acquisition, the $868 million price tag on National Beef appears to be LUK’s largest initial outlay yet (ahead of a stake in Jefferies in 2008 for $794 million and WilTel in 2003 for $779 million). Risk related to the size of this transaction could be mitigated, however, by the fact that National Beef has reported solid earnings in each of the last three years. National Beef reported net income of $258 million, $247 million, and $143 million in FY11, FY10, and FY09, respectively (fiscal years ending in August), supported by operating cash flows of $273 million, $244 million, and $264 million.

Using our research process on National Beef’s SEC filings, we identified the following risk factors:

  • Revenue is somewhat concentrated with 8.7% of FY11 net sales attributable to Wal-Mart and Sam’s Club. While it’s not unusual for a food producer to generate a significant amount of business from a large retailer such as Wal-Mart, it is notable that the two parties do not have any contractual agreements.
  • There has been a fair amount of recent turnover in the executive suite as CEO Timothy Klein has only served in that capacity since 2009 while both CFO Simon McGee and COO Terry Wilkerson were appointed to their current positions in Feb-11. However, it should be noted that previous CFO Jay Nielsen (since 1997) remains with the company as Chief Accounting Officer and that Klein had served in the COO position for 11 years prior to his appointment as CEO.

Here is LUK's press release for the transaction.