Lehman Brothers argues for broker-deal subsidiary sale to Barclays

By Rebecca Melvin

New York, Sept. 19 - Lehman Brothers Holdings Inc. fought to gain approval to sell its broker-dealer subsidiary, Lehman Brothers Inc., to Barclays plc under an amended purchase agreement Friday at the U.S. Bankruptcy Court for the Southern District of New York

A decision wasn't reached by press time late on Friday evening, although there was significant pressure to reach a decision before the reopening of financial markets on Monday.

In response to parties' objections and responses, judge James Peck said that the term "enterprise" in the amended sales motion was "wildly ambiguous," and if it wasn't redrafted, it could become a point revisited in some later litigation. Peck also said he intended to rule Friday night, but no decision was reached by 10:45 p.m.

Under the amended purchase agreement before the court, the unit was expected to go for about $1.7 billion, the majority of which was the cost of real estate, including the bankrupt investment bank's Manhattan headquarters.

Pressure for a decision was brought to bear by the Securities Investor Protection Corp., which secured an order Friday commencing Lehman Brothers' liquidation in the U.S. District Court for the Southern District of New York.

The parallel proceeding placed Lehman Brothers Inc. in liquidation to protect Lehman customers, allow the transfer of customer accounts, and unwind the brokerage firm's business.

Volatility in the financial markets was also creating pressure on sealing an agreement as market developments seemingly forced modifications to the purchase agreement on a moment-by-moment basis, Lehman Brothers' counsel Harvey Miller of Weil, Gotshal & Manges LLP told the court.

For example, on Thursday the Chicago Mercantile Exchange unilaterally cancelled or closed out Lehman Brothers positions, resulting in a loss of $1.6 billion to Lehman Brothers, Miller said.

"This is the fifth day of this case, with many moving parts and moving with great velocity. There have been major changes in the transaction, and some not finalized until about a half hour ago," he said.

Economic changes in the agreement from its filing Wednesday included a slump in the deal assets to $47.4 billion from $70 billion due to market developments, Miller said.

Hasty agreement draws fire

The speed at which the sales motion was being conducted led to confusion and frustration among creditors, and there were many objections.

Among objections filed were those from Occidental Energy Marketing Inc., LaSalle LP, Overstock.com, Novastar Financial Inc., TransCanada Pipelines Ltd., Verizon Communications Inc., and Iron Mountain Information Management Inc. Walt Disney Co. filed a response.

Hedge fund Harbinger Capital Partners asked the court to withhold approval of the proposed sale until Lehman disclosed "a basic set of fundamental, easily procured financial details necessary to understand the transaction's fairness." Specifically it alleged a $5 billion transfer of cash from Lehman's London office.

The ad hoc noteholders committee asked for a brief delay to evaluate transaction alternatives because Lehman didn't demonstrate that the sale agreement was the best viable agreement for the assets.

Miller said that the transaction was intended to save about 9,000 jobs, ensure smooth transition of Lehman Brothers Inc. business, and provide stability to financial markets.

"Maybe we missed the RTC by a week, that's the real tragedy," Miller said.

To which Peck responded: "It occurred to me as well."

"It would facilitate a seamless transition of accounts so that those accounts would remain viable come the open of markets on Monday," Miller said.

The assumption of contracts relating to the purchased assets and cure amounts were deferred. Barclays will work on the assumption list and the cure amounts, and a new objection deadline will run until Oct. 3.

Amended real estate stipulation struck

During the course of Friday's hearing, the parties reached an agreement on the value of the real estate, which had been appraised at a much lower level than Lehman had initially expected.

The parties agreed to split the $120 million difference, valuing the Manhattan headquarters at $960 million, with two additional data centers valued at $330 million, down from an initial $450 million.

A stipulation was entered valuing the real estate component of the purchase agreement at $1.29 billion with no commission payable.

There were also changes in what divisions were going to Barclays. OTC Derivatives was not going, and Barclays was not going to buy Eagle Energy Management as initially expected.

However, LB Canada Inc. as well as Lehman Sud America SA and Lehman Uruguay, both part of a private investment management business, known at PIM, which was not part of the original deal, were now being purchased by Barclays.

The acquired business will be merged into Barclays Capital, which forms part of Barclays Investment Banking and Investment Management of which Robert E. Diamond is chief executive.

Among other changes, an upside profit sharing agreement, or true up after 12 months, was eliminated. In the original deal, if Barclays made a profit of business, the first $500 million would go back to estate, with the next $500 million being split on a 50-50 basis.

There was also a requirement for $700 million of cash to be paid over to Barclays that was no longer part of the deal.

New York-based Lehman Brothers Holdings is the fourth largest investment bank in the United States. The company filed for bankruptcy on Sept. 15. Its Chapter 11 case number is 08-13555.

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