Jefferies Group, Inc. (JEF), Leucadia National Corp. (LUK): Merger and a Spinoff at the Same Time

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The new Crimson Wine stock will trade on the over-the-counter markets and can be identified by its CUSIP number of22662X 100. There will be about 24 million outstanding shares of Crimson Wine after the distribution at a par value of $1 per share. As such, Leucadia shareholders stand to earn a premium of about 3 percent relative to the company’s current stock price of $28 per share.

Under the terms of the merger deal, all Jefferies Group shareholders will receive 8.1 shares of Leucadia stock for every 10 shares of Jefferies stock that they own. Although the record date for this transaction has not yet been announced, it is expected to occur by mid-April. Relative to Jefferies’s current stock price of $21.35 per share, this represents a premium of approximately 3.3 percent.

Complications and Legal Issues

At this point, the Crimson Wine Group spin-off appears to be all but assured. Since the merger between Leucadia and Jefferies is predicated upon the successful completion of the spin-off, it is likely that a last-minute failure would scuttle the larger merger deal. Conversely, a break-up of the merger agreement before the spin-off’s completion could render the transaction moot. However, it is overwhelmingly likely that Crimson Wine will begin trading as a separate company on February 25.

Although the merger deal is shrouded in some uncertainty, it also appears likely to be finalized by the end of the first half of 2013.

Long-Term Outlook

Crimson Wine Group has long been one of Leucadia’s least-profitable divisions. As such, its long-term prospects remain unclear. However, there is some reason to believe that a newly-independent Crimson may be able to make targeted investments in certain individual assets and distribution chains. Although some stock-watchers have expressed reservations about the deal, others are more bullish. After all, the North American wine market is growing at a solid pace.

Crimson Wine may also benefit from its divorce from Leucadia in a more subtle fashion. Leucadia is heavily reliant on two aging principals who may retire within the next few years. Thus far, the company has been opaque about its “Plan B” in the event that this occurs. Should a clear post-retirement plan fail to emerge, the company may be thrown into strategic disarray. Since Crimson Wine does not suffer from such a reliance on a small group of principals, it may represent a safer long-term bet.

In sum, Crimson Wine offers a stake on a risky but promising company’s future.  The spread on the JEF/LUK merger; however, may close in the coming weeks. In other words, timing may be critical.  More information on the JEF/LUK merger coming soon on ArbIdeas.com.

The article Merger and a Spinoff at the Same Time originally appeared on Fool.com.

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