Barclays Submits Stalking Horse Bid for Lehman's Broker-Dealer Operations of About $5.7 Billion

Meanwhile, back at the ranch, Lehman has just filed this motion to approve postpetition financing and this motion to approve bid procedures for "the sale of the Purchased Assets" (i.e., the Lehman Brothers, Inc. broker-dealer assets) to Barclays.  Both motions will be presented at today's 11:00 a.m. scheduled hearing.  Here's the hearing agenda.  It's the first opportunity for counsel to explain the case to Judge Peck and a standing room only crowd.  [Noon Update: The hearing was continued until 4 pm today, probably to allow the Committee to select counsel (and the Judge to digest the pleadings).]

According to the DIP financing motion, Barclays is offering to lend up to $450 million on a senior secured basis, collateralized by a first priority lien on Lehman's equity interests in Neuberger Berman Holdings LLC. This loan appears to be a bridge to a sale of Lehman Brothers, Inc. (LBI), Lehman's primary broker-dealer subsidiary, to Barclays for $1.7 billion cash and assumption of certain liabilities and contracts (the cure costs of which will add an additional approximately $1.5 billion to the purchase price).  The $1.7 billion cash consideration is based on a payment of $250 million cash plus the appraised values of Lehman's NY headquarters at 745 Seventh Ave. and the Cranford and Piscataway NJ Data Centers, which will presumably bear the Barclays logo after closing.

Barclays also has agreed to offer employment to about 10,000 North American-based employees of LBI (or about 70% of the North American workforce) for 90 days, to pay their Christmas annual bonus, and to provide normal severance benefits for any worker terminated based on "reductions in force" or "job eliminations" (all at a projected cost of about $2.5 billion).  Section 3.3 of the Agreement provides for a purchase price adjustment (which could favor either Lehman or Barclays depending on market results) of up to $500 million on the one-year anniversary of closing based on profits or losses realized in various assumed long or short "Positions" (the "Long Positions" alone have a book value today of about $70 billion).  Lehman Commercial Paper, Inc., a more toxic division, is excluded from the deal. 

Time is of the essence for the sale, the motion states (and so does Milbank's Luc Despins), and the proposed Purchase Agreement contemplates that prior to the sale hearing, LBI will consent to commencement of a case under the Securities Investor Protection Act of 1970 and appointment of a SIPA trustee, which itself will have to ask the consent of the SIPA Court for the sale. 

The break-up fee is $100 million plus $25 million in reimbursable expenses.  In addition, the motion proposes a "KERP" retention plan for about 208 employees, of whom 200 are designated as "key to the success of the business" and 8 as "critical to the success of the business."  Though the motion doesn't identify who these employees are, my guess is that Dick Fuld (see Congressional invitation here) is not on that list.

The closing date for the sale is September 23, which is like a nanosecond given the size of the deal, but it's probably just slightly less time than Barclays had to consider the deal.  We'll see if the Judge authorizes such a short a window, and much will depend on the marketing process that occurred in advance of the filing and the expressions of interest generated.  $5.7 billion is a big nut, and in today's environment when cash is king and flowing like molasses as the market loses about 5% in value a day, it'll be a tough number to beat.

Evidencing the furious pace of negotiations is the fact that the executed draft of the Asset Purchase Agreement attached to the sale motion is a marked-up "confidential" draft that was re-marked as the "Execution Copy."  The documents is remarkably loaded with substantive handwritten interlineations and cross-outs on virtually every page.  Rarely does one get this kind of insight into final, last-minute negotiations.  The draft line on the bottom of the page says it's "v.2," suggesting that the execution copy was the third and final run.

Those interested in seeing who's on the "A" list of people getting notice of the proceedings will find the current service list here.

My previous Lehman posts are here (Lehman's Free Fall), here (Bankruptcy Update), and here (Committee Formed).

Thanks for reading, and thanks to those who have called or written with comments, kudos, and suggestions!

© Steve Jakubowski 2008

Written By:Gene Kline On September 19, 2008 7:24 AM

Thanks for your hard work and time spent in preparing these updates; they are greatly appreciated. Would you care to venture into your estimates of anticipated recovery rates for senior notes and/or preferred shareholders? I've heard that if the illiquid assets are held by Lehman during a lengthy bankruptcy proceeding, it's possible that they will actually appreciate in value, and that the Preferreds may get a return on the stock. Any insight would be greatly appreciated.

Gene Kline
Apollo, PA

Written By:Steve Jakubowski On September 19, 2008 4:27 PM

I'm a lawyer, not an investment banker, so cannot venture even a guess as to estimated anticipated recovery rates. Lehman is represented by Lazard and the Creditors' Committee is represented by Houlihan Loukey. They'll have a much better sense. Best of luck to you.