Lehman Brothers Holdings Inc. announced plans to spin off to its shareholders the "vast majority" of its commercial real-estate assets, sell about a 55% interest in its investment-management division and slash its dividend 93% as it also predicted a fiscal third-quarter loss of $3.9 billion.
The moves are part of Lehman's largest effort yet to dramatically reduce its exposure to commercial real estate and residential mortgages and generate additional capital.
Shares, which were up some 25% in premarket trading before the news and turned lower in the aftermath, were recently up 14.6% at $8.93 in extremely heavy trading.
Chief Executive Richard Fuld — who fought off a severe challenge to the bank's credibility in 1998 and now has found himself trying to do so again — said Lehman's latest plans "reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance-sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability."
Lehman said its planned spinoff, expected to close in the fiscal first quarter, will leave the firm with limited commercial real-estate exposure.
As for the dividend cut, Lehman's move to slash its annual dividend to 5 cents from 68 cents a share is expected to save the firm $450 million a year.
Lehman's plans to sell a majority interest in its investment-management division are expected to result in a tangible book value benefit of more than $3 billion. The company expects to maintain the majority of its pretax income from the unit, which include Neuberger Berman, Lehman's prized asset-management division that was rumored in recent months to be on the chopping block.
The 158-year-old brokerage also confirmed a Wall Street Journal report that it is working with money manager BlackRock Inc. (BLK) to sell a package of primarily British residential real-estate assets. Lehman said it will sell about $4 billion of its U.K. residential-mortgage portfolio, expected to be completed "within the next few weeks."
Its exposure to residential mortgages will be cut by 47% to $13.2 billion following the BlackRock deal. Lehman also projects reporting a reduction in its exposure to real-estate investments by 18% to $39.8 billion and its high-yield acquisition finance exposure 38% to $11.5 billion.
As for the spinoff, Lehman will turn over to its shareholders $25 billion to $30 billion of its commercial real estate portfolio into a separate publicly traded company to be called Real Estate Investments Global. The move is expected to strengthen Lehman's balance sheet while preserving the value of the commercial real estate portfolio for shareholders.
Meanwhile, Lehman preliminarily reported what would be the brokerage's second — and largest — loss since going public in 1994. The firm said its projected $3.9 billion, or $5.92 a share, loss will be on $7.8 billion in write-downs, offset in part by hedging and debt-valuation gains. In its fiscal second quarter, the firm posted a $2.77 billion loss on write-downs of mortgage-related assets.
The brokerage expects to post negative net revenue of about $2.9 billion amid the write-downs and trading losses.
Analysts surveyed by Thomson Reuters were recently expecting a loss of $3.35 a share on revenue of $286.3 million.
By segment, the capital-markets business will post negative net revenues of $4.1 billion, wider than the negative $2.4 billion posted in the second quarter. Investment-banking revenue is seen slumping 33% from the prior quarter and 45% from a year earlier. Investment management, the division from which Lehman said it will sell a majority interest, is expected to post $600 million in net revenues, down 25% on a sequential and year-over-year basis.
The firm said its liquidity pool is estimated at $42 billion, while its Tier 1 ratio is expected at 11%, up from 10.7%. The leverage ratio — how many times assets exceed a firm's equity — fell to 10.6 from 12.1 at the end of the second quarter. The higher the number, the more debt the firm has taken on to fund those assets.
Stockholders' equity as of Aug. 31 was estimated at $28.4 billion, up 8% during the quarter.
The struggling investment bank's common stock closed down 45% Tuesday and earlier in the day hit a fresh 10-year low on worries it wouldn't be able to raise needed capital. South Korean regulators dashed hopes that government-owned Korea Development Bank would make an investment — thought to be around $4 billion — in Lehman, saying talks between the two parties had ended.
The severe stock drop shows how skittish investors have been about Lehman, a bond-focused firm that moved aggressively into the commercial real-estate market and leveraged loans over the past few years, and often produced record profits between 2004 and 2007.
Lehman expects to report its full quarterly results Sept. 18.