A Bottom Feeder Goes Bigtime Little-known value investor Leucadia National is suddenly attracting attention thanks to its bold bid for MCI.
By Adam Lashinsky

(FORTUNE Magazine) – Say, for a moment, you came across a company that looked like a smaller version of Berkshire Hathaway--but with a better record. And that this mini-Berkshire was run by a couple of investment pros who looked for uncommon values, wrote folksy shareholder letters, and owned a big chunk of their firm, just like Warren Buffett. And, finally, that the firm was quietly bidding to take control of beleaguered long-distance carrier MCI, a move that would make it a lot more famous.

Would you buy the stock?

If historical results were any indication of future performance (and of course they're not), then buying a piece of Leucadia National (LUK, $50) would be a no-brainer. Founders Ian Cumming, 64, and Joe Steinberg, 60, are seasoned and respected investment pros, and Leucadia's 15-year average annual return of 22% easily bests Berkshire Hathaway's almost 18%. (Straight stock appreciation isn't as obviously impressive because Leucadia paid a one-time, $812 million, $13-plus-per-share dividend in 1999.)

But now the New York City--based conglomerate is entering one of its riskiest phases ever. Like a host of investment-world icons before it, Leucadia is making huge bets on telecommunications even as that industry gets sicker. And buying into Leucadia is a gamble on two managers who acknowledge that their retirement isn't all that far off.

Cumming, the firm's chairman, and Steinberg, its president, have been running Leucadia since the late 1970s, when they took control of a publicly traded financial company and turned it into a vehicle for investing in deeply undervalued businesses--no matter the industry. Over the years their firm has owned numerous insurance and banking operations, interests in other investment firms, commercial and residential real estate, a hotel on Waikiki Beach, the Maryland Jockey Club (which owns Pimlico racetrack), and a copper mine in Spain. Leucadia has even done business with Berkshire Hathaway, forming a joint venture in 2001 called Berkadia that bought the assets of a bankrupt finance company to milk its remaining receivables. "Berkadia has made excellent money for us," Warren Buffett told Berkshire Hathaway shareholders recently. "And Joe and Ian have been terrific partners."

What Joe and Ian are not is terrific chatterboxes. They almost never give interviews, nor do they answer questions from investors. Not one analyst on Wall Street follows Leucadia. (The secretary of Leucadia's CFO hung up on FORTUNE without bothering to learn why the magazine was calling.) Unsurprisingly, people associated with Leucadia won't talk about it either. "I don't know Ian Cumming and Joe Steinberg," quips Leucadia director Jay Jordan, a normally gregarious proprietor of his own buyout firm, who has worked with the secretive twosome for decades.

Instead, investors are left to discern Leucadia's intentions from the annual shareholder letter, a many-page missive packed with witticisms and homespun advice. Urging shareholders to support the Leucadia-owned Pine Ridge and Archery Summit wineries, Cumming and Steinberg write, "Remember--wine is food, and in moderation is good for vascular upkeep." Noting Leucadia's 36% interest in Barbados Light & Power, a utility, they continue, "Shareholders are encouraged to holiday in Barbados and not to turn off the lights and air conditioners!"

It will take more than wasteful vacationers to juice Leucadia's future returns. At the end of March, Leucadia had $1.2 billion to invest. So far this year it has made a failed run at a natural-gas pipeline company called Plains Resources, losing out in a bidding war to Paul Allen's Vulcan Ventures (see "Paul Allen Drills Into a New Field" on fortune.com). On July 8 it requested permission from antitrust regulators to acquire 50% or more of MCI.

The move would effectively be a doubling down on an already risky telecom wager. In 2002 and 2003, Leucadia paid $778 million to buy WilTel Communications, the once-bankrupt fiber-optic phone company. WilTel offered a $3.4-billion tax-loss carry-forward that can be used to offset future profits. But first it needs to find the profits. Since the WilTel acquisition--"by far the largest investment Leucadia has made to date," Cumming and Steinberg say--the telecom business has gotten worse, and Leucadia calls WilTel a "work in progress."

Telecom watchers are scratching their heads over why Leucadia would want MCI as well. One theory has Leucadia keeping MCI away from SBC, which last year accounted for 52% of WilTel's revenues and wouldn't need WilTel anymore if it owned MCI. Another has Leucadia merging MCI with WilTel to create a dominant long-distance company. Either way, it's risky. "Financial buyers like to enter at the bottom," says Shing Yin, an analyst with the telecom-oriented research shop RHK. "But the telecom market has continued to decline in valuation." And the market doesn't seem to be too impressed with Leucadia's overture. After the bid was announced, the stock price jumped, but it quickly fell back--before popping Aug. 6 after MCI declared a big dividend.

Leucadia's bid for MCI underscores how focused on telecom the company has become. Income from continuing operations has been dwindling as Cumming and Steinberg have sold off businesses. What remains is a hodgepodge of companies like plastic-netting maker Conwed, a chain of physical-therapy centers called Symphony Health Services, and MK Resources, the Spanish copper miner. "These are not recognized names of the likes of [Berkshire holdings] Gillette and Geico, and have no competitive advantages," argues Alfred Meyer, who runs 2nd Opinion Research.

At the end of the day, investing in Leucadia means betting on Cumming and Steinberg's acumen. "For years they've been able to take these assets that don't look so good and turn them into gold," says Norm Kiken, a former Leucadia CFO who now owns Reverie Winery in Napa Valley. But with their telecom moves, they are making a late-career foray into a new and perilous industry. If you want to own something like Berkshire Hathaway, perhaps the better solution is to buy the real thing.

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