Jefferies agrees to sell itself to Leucadia in $2.8 billion deal

Employment Contract

Leucadia said in April that Chairman and Chief Executive Officer Ian Cumming, then 71, didn’t plan to request a renewal of his employment contract, ending in June 2015. Cumming has run the company since the 1970s with President Joseph Steinberg, who was 68 at the time of the company’s proxy filing in April.

“Over the next few years there will undoubtedly be more developments on the succession front,” Cumming and Steinberg said in a letter to investors posted on the company’s website in April. “We will keep you informed.”

Before the announcement, Leucadia shares were trading at 1.02 times tangible book value, a measure of what investors are willing to pay for a firm’s equity after removing intangible items such as goodwill and brand names that would have little value if the company went out of business, according to data compiled by Bloomberg. Jefferies was trading at 97 percent of tangible book value before the deal, the data show.

Retention Deals

Jefferies won’t offer retention deals to its employees and it doesn’t expect layoffs, Handler said on a conference call following the announcement.

The company said it will continue to issue long-term debt.

Jefferies has boosted headcount by 68 percent since 2008 to more than 3,800 as bigger rivals contracted in the wake of the financial crisis. Handler has said his firm is focusing on transparency and managing risk after the collapse of MF Global Holdings Ltd. last year fueled investor concern that Jefferies might be hurt by Europe’s market turmoil.

MF Global filed for bankruptcy on Oct. 31, 2011, after revealing a $6.3 billion bet on the bonds of some of Europe’s most indebted nations, which prompted a credit rating downgrade. Following MF Global’s collapse, Jefferies issued at least six statements detailing its investments in European sovereign debt to stem losses in its shares, which fell 14 percent in November 2011.

‘Finest Hour’

Cumming and Steinberg called Jefferies executives’ response to the crisis “their finest hour,” according to the April investor letter.

The takeover comes a month after Moody’s Investors Service downgraded Jefferies’s senior debt to Baa3 from Baa2, citing “risks presented by institutional capital markets activities and the challenges of operating the investment-banking model.”

Fitch Ratings said it expects to downgrade Jefferies one level to BBB-, one grade above junk, once the deal is completed.

“After the proposed merger, Jefferies would become much more exposed to the market risk inherent in the other subsidiaries’ investments at Leucadia,” Fitch said today in a statement. “Conversely, becoming a privately-owned company may help insulate Jefferies from external market pressures similar to those experienced in November 2011.”

Leucadia had $6.19 billion in equity as of Sept. 30 supporting $8.74 billion in assets, according to a filing from the investment firm. It’s buying a company with $3.71 billion of equity supporting $34.4 billion of assets, according to Jefferies’s latest quarterly filing.

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