Leucadia National is buying the investment banking firm Jefferies Group for about $2.8 billion in stock in a deal executives said Monday would better position both companies for growth in the years ahead.
The transaction will make Jefferies the largest business for a diversified holding company with more than $9 billion in assets, ranging from lumber and plastics manufacturers, energy production facilities and an oil and gas contract driller to medical product developers, a hotel and casino, wineries and other real estate interests.
Leucadia already held a 28.6 percent stake in Jefferies, which will still operate as a full-service investment banking firm. After the deal closes, 35.3 percent of Leucadia's stock will be owned by Jefferies Group Inc. stockholders.
As part of the deal, Jefferies Chairman and CEO Richard Handler will become the CEO of Leucadia. Leucadia's Chairman and CEO Ian Cumming will retire but remain on the board. Leucadia President Joseph Steinberg will become chairman.
Handler emphasized that the deal is being done at a time of significant strength for both companies and said its aim is to create more long-term value.
"In Jefferies, Leucadia is acquiring a strong engine to be its lead operating company for the future," he said on a conference call. "And Jefferies is becoming part of a larger platform, from which to continue its growth."
Combining the two, he said, provides better protection "from any treacherous quarters that may surface" in the markets.
Jefferies' stockholders will receive 0.81 of a share of Leucadia stock for each share they hold. This doesn't include Leucadia's current 28.6 percent of Jefferies outstanding stock.
The companies' boards have approved the deal. It still needs approval of both companies' shareholders.
Jefferies' shares rise $2.00, or 14 percent, to close at $16.27 on Monday.
On Monday, Leucadia National Corp. said it may spin off its Crimson Wine Group before the Jefferies' deal is complete.
Once the transaction closes, Jefferies' four independent directors will join Leucadia's board, which will boost the board's size to 14 members.
Morningstar analyst Michael Wong said the deal is both a sound defensive and offensive move for Jefferies.
"Being a part of Leucadia with its diversified portfolio of companies and relatively strong balance sheet gives Jefferies fairly firm backing," he said in a note to investors. "The timing of this deal seems appropriate given the risk of a U.S. fiscal cliff and re-emerging European debt concerns."
For Leucadia, he said, the transaction is "transformational" but not as positive for investors.
Ratings agencies Moody's Investors Service, Standard & Poor's Rating Services and Fitch Ratings said that they are reviewing Leucadia's ratings for a possible upgrade. Fitch said that if the Jefferies' deal closes and there are no adverse credit developments, it is likely that Leucadia's issuer default rating will go to investment grade status from junk status. Standard & Poor's said that its issuer credit rating for Leucadia may also move to investment grade status from junk.
Leucadia fell 66 cents, or 3 percent, to close at $21.14.