Lehman in "Urgent" Talks to Close Deal Before Expected $4 Billion Writedown

When the Korea Development Bank had signaled that buying a stake in an investment bank might be premature at this juncture, it had appeared the bureaucrats had beaten back KDB’s chairman and former head of Lehman’s Seoul branch, Min-Euoo-song, who was pushing the deal. But the Telegraph tells us not only that negotiations are back on, but that Lehman appears desperate to cinch a deal before its earnings are announced in roughly two weeks.

And no wonder. The Telegraph indicates the earnings release will include $4 billion of writedowns. Note that this is consistent with, even lower than some of the estimates out on the Street now. For instance, Merrill’s Guy Moszkowski forecasts that Lehman will lose $2.6 billion in its third quarter, showing $4.5 billion in losses, with a 35% reduction due to gains on hedges.

So if these numbers are already reflected in the stock price, why the scramble to get a deal done? Is this simply adherence to the recent practice of having capital-raisings in hand that are equal to or in excess of the hit to capital? Is it that, as with the second quarter, the losses that will be announced are vastly worse than expected? Or is it that the details in the financials will suggest that further deterioration is likely?

From the Telegraph:

The Sunday Telegraph has learned that Lehman has intensified talks in recent days with Korea Development Bank, the South Korean government-backed lender, about a capital injection of as much as $6bn (£3.3bn). KDB has drafted in bankers from the heavyweight advisory boutique Perella Weinberg to provide counsel on the talks, which could be concluded this week.

The acceleration of the negotiations, which Lehman wants to have wrapped up before it reports third-quarter earnings in mid-September, underlines the urgency with which one of the US banking industry’s most venerable names is seeking capital.

If the talks with the Koreans fall through, Lehman is lining up alternative investment from other sources, including Citic Securities, a Chinese brokerage which was on the verge of investing in Bear Stearns before its implosion earlier this year, which resulted in a cut-price takeover by JP Morgan, another Wall Street banking group.

Lehman is also holding talks with a number of sovereign funds from the Middle East, which have been invited to participate in a capital-raising. These are understood to include investors from Abu Dhabi and Qatar.

Under the structures being discussed by Lehman executives, including Richard Fuld, the bank’s chairman and chief executive, KDB could buy up to 25 per cent of Lehman, which has a market value of just $11.2bn following a slump in its share price this year.

Alternatively, if it proceeds with a deal with Citic or the Gulf investors, Lehman is likely to sell no more than 10 per cent of itself to each of those funds, but could combine it with a broader equity-raising in the open market. Fuld, who is determined to avoid a sale of the bank’s prized assets at distressed prices, is understood to have assigned several of his key executives to look at different fundraising scenarios.

Other options open to the Lehman board, whose members include Sir Christopher Gent, the former chief executive of Vodafone and current chairman of GlaxoSmithKline, include the sale of part or all of its asset management arm.Lehman’s so-called “crown jewel”, it includes Neuberger Berman, a highly rated fund management business. Analysts have valued the division at up to $10bn.

“The preferred option is not to sell any of it unless they cannot raise enough from external investors,” said a person involved in the talks. Dozens of parties, including JC Flowers and Kohlberg Kravis Roberts, have expressed an interest in the business.

Fuld is also keeping Lehman’s board appraised of plans to spin off the bank’s troubled $40bn commercial real estate portfolio, which may result in the creation of a separately quoted company in which Lehman Brothers shareholders would be given equity. The demerger of the real estate assets would leave the investment bank with a cleaner risk profile and remove one of the main drags on its share price…

At its earnings announcement next month, Lehman is expected to disclose further writedowns of about $4bn, to add to the $8bn in writedowns and losses already declared.

Print Friendly, PDF & Email


  1. Dean

    If I were KBD, I would demand 100% of Lehman for the same price asked for the 25%. Being the rescuer why would I accept anything less than total control?

  2. doc holiday

    Old news, but what was the deal with Lone Star about a week ago?

    Regulator urges caution for KDB over possible Lehman investment

    “In principle, taking over a global investment bank can become an opportunity to raise the capability of the (Korean) investment banking business. But at the same time, as the risks are also big, KDB should take a cautious approach (to such possible investment),” Jun Kwang-woo, chairman of the Financial Services Commission (FSC), told a press conference.

    Jun said it would be better for private lenders to play a leading role in pushing to take over a global investment bank, expressing the watchdog’s negative stance toward the KDB’s possible deal with Lehman.

    “The watchdog welcomes any efforts led by the private sector to go global, but it may be not proper for state-owned financial institutions to lead the role and take on excessive burdens,” Jun added.

  3. dh


    The FSC had asked HSBC to resubmit its application in late July with some revisions as eight months had passed since the initial submission.
    HSBC had initially submitted the application in December, after entering into an agreement with U.S.-based Lone Star Funds last September to buy KEB’s controlling stake for around $6 billion.
    However, the FSC withheld approval, citing legal “uncertainties” over the U.S. buyout fund’s 2003 purchase of the South Korean bank.
    FSC Director-General Kim Gwang-soo said in late July that the resolution of legal uncertainties will come when the Seoul Central District Court gives its ruling on the ongoing trial involving a former finance ministry official and two former KEB executives.
    The three are being charged for breach of trust over their alleged links to Lone Star. Prosecutors said they facilitated the sale of the KEB stake to the Dallas-based buyout fund at a lower price than it was worth.
    Media and government officials expect the court decision to come out in September or October.
    Lone Star bought KEB for about $1.3 billion in 2003.

  4. dh

    FYI2: K.D.B. said on Friday it was open to the acquisition of an overseas financial institution, naming Lehman Brothers as one of its options. The comments sent Lehman’s share price up 12 percent on the day.

    “I think that K.D.B. might have considered forming and leading a consortium (to buy Lehman Brothers),” Financial Services Commission Chairman Jun Kwang-woo told reporters. “But it appears burdensome for a state-run institution to play a leading role (in the purchase of a foreign company) and take risks which may be more than financial.”

    Cross-border acquisitions by South Korean companies should be led by the private sector and state-run institutions such as K.D.B. should play a “cheerleader role,” Jun said.

    Ok, I’m done…

  5. Anonymous

    And then if you modestly consider the “establishments” back filling, “enforced blind side”, to balance sheet “mark to market” regs, and that other thing called, but never recently spoken, “shadow banking” AKA “off the balance sheet” “investments” (sorry for all of the quotes) you then might take Lehman over if they paid you several billion in high grade bars of gold bullion delivered in advance. Otherwise, why bother unless you’re a third world dingus with an inferiority complex?
    Earl L. Crockett
    Santa Cruz, CA

  6. dh

    I feel I should use an alias or shut up, but just adding some FYIs:

    Lehman has issued 14 million shares of its stock at various times under the Neuberger Long-Term Incentive Plan, according to an Oct. 10, 2007 regulatory filing. Since the lifetime maximum Lehman can issue under that plan is 15.4 million shares, the Neuberger LTIP, as it is called, is nearing the end of the line. Aside from the fact that much of their Lehman stock is now underwater –the stock is down 78% from the 52-week high of November and 58% from the day the deal closed — the complaints within Neuberger center around the coming end of those stock grants. Of course, it is not possible to know how much stock Neuberger employees have already cashed in.
    In any sale, Neuberger’s employees don’t have many advocates within Lehman now, with the exception of Schwartz. Two of the architects of the deal have left Lehman. Former Neuberger CEO Jeffrey Lane left for Bear Stearns in July 2007 and this July became CEO of private bank Modern Bank. Last week marked the departure of Ted Janulis, who had been overseeing Lehman’s mortgage business but in 2003 was head of Lehman’s wealth and asset-management unit and helped guide Neuberger’s integration. Meanwhile, Lehman is making plans to cut about ,000 employees, according to Bloomberg.
    Neuberger’s performance has been strong compared with other fund managers, and it often is called the crown jewel of Lehman Brothers because of its strong growth over the past five years. Neuberger is currently at the tail end of Morningstar’s top-10 fund management companies as of July. Morningstar, which ranked U.S. equity funds, put Neuberger Berman in 10th place in July, up from no. 15 in April.
    Any acquisition of an asset manager depends heavily on employee retention. It seems the savvy people at Neuberger have figured that out.

  7. Jojo

    Lehman is the focus of this Businessweek story.
    Wall Street's Big Sell-Off
    Even after deep discounting, Lehman Brothers' assets may go without buyers. Is an S&L-style bailout in the offing?

    Full article

  8. etc

    richard smith:

    You do a link in html this way. Say you want a link to a URL, the command is as follows, except replace the "http://www…." with the URL you want to link to and replace the brackets with carrots (ie, < and >): [A HREF="http://www…." REL="nofollow"]Full article[/A]

  9. Anonymous

    What about the new securitization that is supposed to offload a vast quantity of the toxic waste from Lemon’s books…wait a second…wasn’t that the R2 structure that bought toxic mortgages…last quarter? Or was it One William Street. It never ends.

    Why the CEO is holding out for better terms in any sale of Neuberger is beyond me…strongly reminiscent of Alan Schwartz at BS going to Palm Beach for a banking conference…the forest for the trees, etc.

    Where is Einhorn? Need him to shed some light on what is really going on.

Comments are closed.