Barclays completes Lehman acquisition; Bay Harbour files appeal

By Caroline Salls

Pittsburgh, Sept. 22 - Barclays completed its acquisition of Lehman Brothers Holdings Inc.'s North American investment banking and capital markets operations and supporting infrastructure Monday, and Lehman has begun to reopen for business under the ownership of Barclays Capital, according to company news releases.

More than 10,000 Lehman Brothers employees have been offered jobs in the new entity, Barclays said.

The U.S. Bankruptcy Court for the Southern District of New York approved the sale of Lehman Brothers' fixed-income and equity sales, trading and research, prime services, investment banking, principal investing and private investment management businesses in North America early Saturday following a sale hearing that began late Friday afternoon.

As previously reported, Barclays originally offered roughly $1.7 billion for the Lehman assets, but changes to the value were being discussed at Friday's sale hearing.

Among those changes, the parties agreed to split the $120 million difference on the value of real estate, valuing Lehman's 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.

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 the 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.

Purchase price details

According to an 8-K filed with the Securities and Exchange Commission, the final purchase price was $1.54 billion, plus the assumption of liabilities.

The purchase price includes $250 million in cash and the assumed liabilities, as well as $1.29 billion for Lehman's headquarters and two data centers.

The key liabilities being assumed include all liabilities of the business incurred by Barclays after the closing; Lehman's liabilities under contracts purchased by Barclays arising after the date on which the entity filed a bankruptcy case; and some liabilities related to benefits to be provided to Lehman employees who are transferred to Barclays.

Barclays said the integration process for the combined businesses began immediately after the court's sale approval, and a large number of employees from both organizations worked over the weekend to activate and integrate all of the risk and trading systems following the bankruptcy of Lehman Brothers Holdings.

However, Barclays said the process is still ongoing, which means that Lehman Brothers' sales and trading business were not able to conduct business Monday.

Lehman Brothers' banking and advisory functions were open for business Monday, and Barclays said Lehman Brothers' capital markets and trading businesses will resume fully functional operations shortly.

Barclays Capital said its existing businesses are fully functional and not impacted by this transaction.

Employment offers have been made to all employees of the Lehman Brothers businesses that have been acquired by Barclays Capital, including Lehman Brothers Private Investment Management business, transferring to Barclays Wealth, the wealth management arm of Barclays plc.

The combined firm will use the Barclays Capital name. Barclays said it has purchased the rights to use the Lehman Brothers name and will consider opportunities to do so.

"The Barclays-Lehman Brothers partnership is now a reality," Barclays plc president and Barclays Investment Banking and Investment Management chief executive Bob Diamond said in a release.

"Together, we can be a truly powerful firm across all the global capital markets. Our story begins today."

Letter agreement

In connection with the asset purchase agreement, Barclays, the Depository Trust & Clearing Corp., Lehman Brothers' trustee James W. Giddens and Barclays entered into a letter agreement under which the trustee instructed the company's clearing agency subsidiaries to close out the pending clearing agency account transactions, according to the 8-K.

Lehman Brothers and Barclays agreed that $250 million of the purchase price will be paid to the DTCC to provide collateral against any losses, claims, damages and expenses of DTCC and each of the clearing agency subsidiaries.

Barclays Capital, Citi, Credit Suisse Securities (Europe) Ltd., Deutsche Bank AG, London Branch and JPMorgan Cazenove Ltd. are acting as financial advisers to Barclays, while Credit Suisse Securities (Europe) Ltd. and JPMorgan Cazenove are joint corporate brokers to Barclays and Clifford Chance LLP and Cleary Gottlieb Steen & Hamilton LLP are acting as legal advisers to Barclays.

According to the 8-K, Alvarez & Marsal's Bryan P. Marsal has been appointed as Lehman's chief restructuring officer, effective Sept. 15.

Sale appealed

According to a Monday court filing, Bay Harbour Management LC, Trophy Hunter Investments, Ltd., BHCO Master, Ltd., MSS Distressed & Opportunities 2 and Institutional Benchmarks have appealed the approval of the asset sale.

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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