Lehman wins court approval of auction rules

By Christopher Scinta, Bloomberg

NEW YORK — Lehman Brothers Holdings Inc.’s investment-management business can be auctioned under modified rules that leave Bain Capital LLC and Hellman & Friedman LLC as the lead bidders, a judge said. U.S. Bankruptcy Judge James M. Peck at a hearing Thursday in New York approved the auction rules requested by Lehman, the fourth-largest investment bank before it filed the biggest bankruptcy in history. The Bain and Hellman & Friedman bid values the investment-management business, which includes Lehman’s Neuberger Berman business, at US$2.15 billion. Lehman changed the rules and reduced the breakup fee and expense reimbursement that the lead bidders would receive if they were outbid after negotiations with creditors and bondholders. Those groups withdrew their objections to the auction rules after those changes were made. “I believe the adjustments described on the record reflect a significant enhancement in those bid procedures,” Peck said. He granted approval over the objections of Carlyle Group and Crossmark Investment Advisers LP, which have both said they would be interested in bidding for Lehman’s investment- management business. The breakup fee was cut to US$52.5 million from US$70 million and the lead bidders must now document any expenses they seek to have reimbursed, said Lehman attorney Lori Fife. Previously, the bidders were allowed as much as US$35 million for expenses without itemizing them, according to court filings. The auction was moved up to 45 days from Thursday, instead of 60 days because the assets were well-marketed and other potential bidders such as Carlyle have already surfaced, Fife said. A competing bidder may now submit an initial bid that exceeds that of Bain and Hellman & Friedman by only US$25 million, Fife said. Previously, rival bids had to exceed the current one by at least US$50 million and the rules prohibited “joint bids” or “management buyouts,” she said.

Carlyle was pleased by the reduction of the breakup fee and rule changes that will allow the buyer to force some Lehman units into bankruptcy as part of the purchase, said Carlyle lawyer Philip Mindlin of Wachtell Lipton Rosen & Katz. The private-equity firm said it is still concerned that lead bidders are being allowed to solicit approval from clients to take over their accounts before the deal closes.

“This solicitation process should be stopped now,” he told Peck.

The judge said he wasn’t pleased about the provision allowing Bain and Hellman & Friedman to solicit Lehman’s clients before the auction, though he didn’t deny the motion. He noted that sending more than one request to clients to approve transfer of their accounts to a new owner would likely drive more away.

“This transaction appears to be a private sale masquerading as a public one,” the judge said. “But that was also true of the Barclays transaction.”

John Bluher, general counsel of Lehman’s investment- management division, testified that Bain and Hellman & Friedman haven’t begun soliciting clients.

Carlyle, based in Washington, said the proposed buyers of Lehman’s money management units may get them for as little as US$900 million, or about 42 percent of the stated price. The firm is working with Jeffrey Lane, the former chairman and chief executive officer of Neuberger Berman, one of the units, on a bid for all or part of the investment-management division.

Bain and Hellman & Friedman agreed Sept. 29 to buy most of the asset-management business from bankrupt Lehman for US$2.15 billion, minus US$400 million for executive bonuses. Sales of assets in bankruptcy are typically subject to higher offers at a court-supervised auction.

Lehman bought Neuberger Berman in 2003 for US$3.2 billion to expand the firm’s wealth-management business and later consolidated its asset-management operations into a single division. Lehman sold its North American brokerage business to Barclays Plc.