The Wall Street investment bank Lehman Brothers is this weekend locked in talks with a group of foreign government-backed investment funds in an effort to secure billions of dollars in new equity capital.
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.
If the Korean, Chinese or Gulf institutions proceed with an investment in Lehman, it will be the latest in a series of international banking groups to tap the Middle East and Asia for capital since the credit crisis began just over a year ago.
In the US, Citigroup, Merrill Lynch and Morgan Stanley have been the principal recipients of such capital injections, while in Europe, Barclays, Fortis and UBS have sought new capital.
Banking stocks have suffered a fresh battering on Wall Street in recent weeks following analysts’ predictions that another major US financial institution will collapse.
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.
There have been suggestions in recent weeks that Lehman could become the target of a hostile takeover following the failure of an earlier round of talks with KDB and Citic. Potential buyers might include Barclays, although people close to both companies say no serious discussions have been held between them so far.
Last night, Lehman Brothers did not return calls seeking comment.
By Mark Kleinman
Last Updated: 1:27am BST 31/08/2008