Richard Fuld’s plan to keep Lehman Brothers Holdings Inc afloat depends on whether the chief executive officer can sell a business that he’d rather keep to a buyer who may not be able to pay for it.
Lehman told investors yesterday it will auction off a 55 per cent stake in its asset-management unit, which oversees $277 billion, including funds run by Neuberger & Berman LLC Private-equity firms KKR & Co. LP, Bain Capital LLC and Hellman & Friedman LLC may make bids valuing the unit at about $5 billion, according to two people familiar with the negotiations.
Losses of $6.7 billion in the past two quarters and an almost 90 per cent drop in Lehman’s stock since the start of the year forced Fuld to put the division up for sale after prices for fund companies dropped to the lowest since 2002. The lack of financing for leveraged buyouts will make it harder for the New York-based securities firm to pull off a deal.
“Fuld doesn’t want to let it go,” said Bruce Foerster, a former Lehman executive who is president of South Beach Capital Markets in Miami. “He went out of his way to buy it and he knows it’s a good asset.”
An LBO of the fund unit will test the buyer’s ability to finance a takeover as investment banks remain skittish about committing debt to new deals. Blackstone Group LP President Tony James said September 9 that financing for deals worth more than $5 billion was difficult to arrange. The value of announced private-equity deals worldwide has dropped 70 per cent to $193 billion in 2008 from a year earlier, according to data compiled by Bloomberg.
Financing Concerns: “Unless it is fire sale, where do they get leverage to get their return?” said Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island. “I don’t think there is any one who will lend them that kind of money in today’s market.”
Lehman didn’t name potential bidders for the unit in a statement or conference call with investors yesterday. The Lehman sale doesn’t include the firm’s holdings in hedge funds such as GLG Partners Inc and the institutional brokerage inside the unit. Officials at the private-equity firms and Lehman declined to comment.
Even a successful sale may not be enough to satisfy credit- rating companies. Moody’s Investors Service said it was reviewing its ratings for Lehman, and may lower them if the firm fails to reach a “strategic arrangement.”
“A strategic transaction with a stronger financial partner would likely add support to the ratings,” analyst Blaine Frantz said in a Moody’s statement yesterday.
KKR’s Interest: Private-equity firms including Carlyle Group and Blackstone decided against making offers for the unit, according to people familiar with the process who declined to be identified because the talks were confidential.
KKR, the private-equity firm led by Henry Kravis and George Roberts, plans to convert to a public company listed on the New York Stock Exchange by the end of the year in a transaction that may give it a market value of as much as $15 billion.
A deal for the asset-management firm might bolster its case to investors that it can expand beyond LBOs. The firm earlier this year hired William Sonneborn from TCW Group to head its asset-management efforts. “That would help the rationale for KKR going public in these markets,” said Jackson Turner, an analyst with Argus Research in New York who follows publicly traded private-equity firms including Blackstone.
