Wednesday, August 20, 2008

What Lehman Wants: Options, Warrants And Partial Stakes

(Dealbreaker) CNBC's Charlie Gasparino, who broke the Neuberger Berman story that everyone else is pretending they broke today, is now reporting that Lehman CEO Dick Fuld and President Bart McDade are mulling a complex transaction that would involve Lehman selling a warrants for a 25 percent stake in itself as well as 70 percent of its investment management business. The deal would include an option for Lehman to buy back the investment management business later.

The particulars are as follows: Lehman would sell 70 percent of the investment management business, while holding on to the remaining 30 percent. It would have a call option on the 70 percent. The buyer, most likely a private equity firm, would get warrants for a 20 to 25 percent stake in Lehman itself.

This is the deal that Lehman is pursuing with private equity firms, apparently. It would allow Lehman to raise a large chunk of capital without permanently giving up the upside in its investment management business. Our own sources suggest that Lehman executives believe that after the current credit crisis passes, they will be able to rebuild the bank.

Gasparino suggests that Lehman may not have the leverage with buyers to force them to take this deal. With time running out and write-downs looming, Lehman could be forced to permanently part with its prized asset management assets.

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