Leucadia to the Rescue After Jefferies Rescued Knight Capital

Tickers in this article: LUK JEF GS MS

NEW YORK ( TheStreet) -- When trading firm Knight Capital (KCG) needed a rescue in August, it called Jefferies(JEF) to arrange a last minute deal with a handful of investors.

Now, only a few months later, Jefferies is getting its own capital injection by way of a sale to Leucadia National (LUK) , which values the struggling investment bank at roughly $3.6 billion .

The Monday morning merger with Leucadia National isn't the last minute call for capital that put Knight Capital into the hands of Jefferies and a handful of other investors, however, the low price of the deal signals Jefferies was in need of a balance sheet injection to withstand a bleak Wall Street outlook.

In the merger Leucadia National - it's already a 28.6% shareholder in Jefferies - will offer 0.81 of its shares for each outstanding Jefferies share in a stock deal that's valued at roughly $3.6 billion as of Friday close.

After the deal is completed, Jefferies chief executive Richard Handler will become CEO of the combined companies and Jefferies will be Leucadia's largest business among a span of operations that give it the moniker of being a mini Berkshire Hathaway (BRK.A) .

A press release announcing the deal keyed in on capital and the $9 billion in shareholder equity that the combined companies will now have.

Leucadia's co-founder Joseph Steinberg will become chairman of the combined company and Ian M. Cumming, another co-founder, will retire but remain a director.

Jefferies' merger with Leucadia comes at a time when the firm's investment banking and trading units face pressure from by a weak economic outlook, the burden of expansion efforts and new regulations that make it more costly to do business.

Meanwhile, Jefferies status as an independent Wall Street dealer a fraction the size of competitors like Goldman Sachs (GS) and Morgan Stanley (MS) caused ratings agencies like Moody's and independent analysts to downgrade the firm's bond ratings just above investment grade levels that are crucial to survival.

Just over a year ago, trading firm MF Global filed for bankruptcy after an outsized position in European government bonds caused ratings agencies to question the firm's capital and cut its bond ratings to junk. In the aftermath of MF Global's demise, investors and some analysts questioned whether Jefferies would be next.

While the Monday deal staves off any lingering comparison to MF Global, it gives new evidence to the struggles gripping Wall Street, as even large players like UBS(UBS) exit key trading areas.

For Jefferies employees, the deal may be a relief. On a conference call with analysts, Jefferies CEO Handler said business is expected to be as usual at the investment bank on Monday and there are no expected layoffs to go with the merger. Meanwhile, all Jefferies employee stock grants will convert to Leucadia units at the terms of the all-stock transaction.