By Christopher Scinta
Nov. 29 (Bloomberg) -- Lehman Brothers Holdings Inc. may not get to close a $2.15 billion sale of its investment- management business to Bain Capital LLC and Hellman & Friedman LLC as a result of a provision tying the deal’s completion to the value of the Standard & Poor’s 500 Index.
The purchase by Bain and Hellman of the division, which includes the Neuberger Berman unit, is conditioned on an S&P 500 average closing price of more than 902 for the 10 trading days before the sale closes. The average for the last 10 days has been about 844, after the index reached its 52-week intraday low of 741.02 on Nov. 21. When the parties signed the deal Oct. 3, the S&P closed at 1099.23.
“The buyer gets the comfort of knowing that a certain market decline does create an out on the deal that is clean,” said Owen Pell, a commercial and securities litigation lawyer at White & Case, about tying the deal to the market. He isn’t involved in the Lehman transaction.
By setting a floor for the S&P 500’s value as a closing condition, rather than relying on the material adverse event clause in the agreement, the buyers may avoid potentially difficult and expensive litigation, Pell said. The buyers may also choose to waive the condition.
Carlyle Group, the second-largest private-equity firm, said in court papers that Bain and Hellman may get Lehman’s investment management business for as little as $900 million.
Another Bidder
Another bidder may top the Bain-Hellman offer by Dec. 1, spurring a court-supervised auction Dec. 3. Carlyle has said it is interested in bidding on the Lehman business and is working with former Neuberger executive Jeffrey Lane. Sales of assets in bankruptcy are often subject to higher offers.
Bain Capital spokesman Alex Stanton and Hellman spokesman Pen Pendleton declined to comment. Carlyle lawyer Philip Mindlin of Wachtell Lipton Rosen & Katz didn’t return a call for comment.
A hearing before U.S. Bankruptcy Judge James Peck in New York to approve a sale to the winning bidder is set for Dec. 22. The deal may close shortly thereafter.
A worst case scenario for Lehman would be if there were no other bids, the S&P 500 wouldn’t reach the closing average required in the Bain and Hellman offer and the private equity firms would choose not to waive the condition and walk away.
Fourth-Largest
Lehman was the fourth-largest investment bank before it filed the biggest bankruptcy in history Sept. 15 with $613 billion in debt. Peck approved New York-based Lehman’s plan to auction its investment management business in October. His approval came only after the bank reduced the breakup fee and expense reimbursement to be paid to Bain and Hellman if they are outbid, making it easier for rivals to submit bids.
The breakup fee was cut to $52.5 million from $70 million. The lead bidders must now document any expenses they seek to have reimbursed. Previously, the bidders were allowed as much as $35 million for expenses without itemizing them, according to court filings.
Competing bidders may submit offers that exceed that of Bain and Hellman by only $25 million, rather than the $50 million overbid originally proposed. The modified rules don’t prohibit joint bids and management buyouts.
Lehman bought Neuberger Berman in 2003 for $3.2 billion to expand its wealth-management business and later consolidated its asset-management operations into a single division.
Bain and Hellman agreed Sept. 29 to buy most of the asset- management business from bankrupt Lehman for $2.15 billion, minus $400 million for executive bonuses.
Peck said he was hopeful the looser rules would encourage other bidders, though he added, “this transaction appears to be a private sale masquerading as a public one.”
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Christopher Scinta in New York bankruptcy court at cscinta@bloomberg.net.
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