Emac's Stock Watch | Fox Business
« OilWorld
Dick Bove: Citigroup's Auction Rate Settlement "No Good" »

  • August 6, 2008 04:14 PM EDT by Elizabeth MacDonald

    Dick Bove's Fix for Lehman Bros.

    Lehman Brothers, the beleaguered Wall Street investment bank, must raise capital, sell as much as $50 bn in distressed debt securities, and cut its dividend by 90%, among other moves, to calm deep concern over its liquidity problems, says Ladenburg Thalmann & Co. analyst Richard Bove in a research note.

    Bove, a sharp-as-a-pencil numbers cruncher who is a top banking and brokerage analyst with a wide following on Wall Street, says Lehman (LEH) must take action because it may record a $3 bn to $5 bn loss in the next quarter. Bove also cut the price target on the stock to $23 from $27.   

    An asset sale could also involve Lehman spinning off 20% of the asset management company Neuberger Berman. Bove assumes Neuberger earns $1 bn pretax and is worth 20 times post tax earnings. The firm by his calculations has a value of $13 bn.

    After the asset sales, Bove is figuring Lehman may need to do a $2 bn capital raise in the form of a preferred offering and the issuance of more long-term debt, adding though that he thinks "Lehman will try hard to avoid the massive dilution that Merrill Lynch (MER) put in place," the analyst said. Merrill Lynch in recent months has raised billions of dollars via dilutive offerings.

    Lehman has been dogged by persistent rumors that it could face a run on the bank similar to the one that caused Bear Stearns to crater earlier this year.

    "My sense is that Lehman feels a need to take action now to stop, for once and, hopefully, for all, the constant stories and rumors swirling around the company," Bove, who rates Lehman shares neutral, wrote. "It is now possible that clients are thinking about their long term relationship with the company because the stories will not die. These clients are becoming increasingly unwilling to make commitments for more than short-term activities. Lehman must, therefore, act to solidify existing customer relationships."

    Bove gave specifics on what he thinks Lehman will likely do: sell $30 bn to $50 bn in securities, mostly backed by commercial and residential mortgages at a discount, and absorb a loss of 10% on the sale; announce the spin-off of 20% of Neuberger Berman to the public; issue a $2 bn straight preferred; issue $1 bn in long-term debt; and cut the dividend, now costing the firm $400 mn annually, by 90%.

    Bove predicted Lehman shares would rally if it moved to allay investor concerns.

    The potential sale of Neuberger Berman was reported in the New York Post more than two weeks ago, citing a research note from UBS bank analyst Glen Schorr. The story also indicated that Lehman has been shopping the unit around for buyers.

    The Post has also reported that Lehman is engaged in talks with prospective buyers about offloading some $30 bn in commercial mortgage assets and other hard-to-value securities, in a move similar to what Merrill Lynch has done.

    The securities have clogged its balance sheet for months and resulted in the demotion of chief financial officer Erin Callan and president Joseph Gregory.

    Bove said however that the quality of Lehman's "paper is believed to be significantly higher than the "sale" recently announced by Merrill Lynch (MER), adding that in turn "the discount may be as little as 10%."

    "I do not know what the company is likely to sell; how much will actually be sold; and what the loss on the sale might be," Bove wrote. "My conviction is simply that the firm must cleanse its balance sheet of these securities to re-establish confidence and it will do so, no matter the cost."

    Bove also increased his loss estimate for Lehman's fiscal 2008 year to $6.33 from $3.66 a share. The 2009 profit forecast was lowered to $1.93 a share from $2.51, and the 2010 estimate was cut to $2.60 from $3.22.

    "However, be aware that the issue for buyers is what the longer term earnings prospects for the company are," he said. "These are not robust at the moment."

RSS Subscribe to Comments

Greedom

Well Liz MacDonald, I will just say - aside from a network that - let's admit it - go into any public forum, bring up Fox, let's be real- and simply reflective - I think MOST people find the prop far from 'fair and balanced' and yet you ? really DO shine on journalistic integrity, I see no 'bias' or leading views you promote in your reporting. If anything, it's probably perfectly balanced with the degree of low level data included to - without question - leave no doubts as to how you are forming your observations. Oh well - I still say I think this is of the best places to be for - not radical - but very intensive research driven / backed viewpoints in this emerging global economy that goes by so many names. I do miss cable/broadband though ! I do rememer though the turning point with MacDonald and Fox though. I INITIALLY had an interpretation of MacDonald through the network and I didn't realize what I thought was posh/staunch upright positionalism ? no no - sheesh was I wrong, current role model for - I know of no one else in media TV wise that listens as carefully and reverently as Liz MacDonald. Not that it's a competitive evaluation there either :) I'm sure there are plenty of terrific listeners in the media when it comes to journalism, as well - the bonus - Liz MacDonald brings very fresh insights, to me ? Genius is seeing that which was prior not integrated in conceptualization(s). I bet if Liz MacDonald were a lawyer, pro bono would never be issue, she'd probably be 1/2 + pro bono, just because, it's what matters in revealing the truth, and I bet she'd have plenty of good cases too ! I'm no fan of parallel universe theory, but perhaps that 3rd career change I read people have ? ! Point here is - I just wanted to say thanks for the insightful articles, and I really don't think you're in it for the money, or any sense of 'celebrity' aspect -that's for sure. Hope if/when the network fails you move on to great things. Retraction would be terrible for NewsCorp to unplug FBN chasing bottom line revenue - then again, after ALL that wheeling and dealing with the Bancrofts, hey, the Sunday what is it ? Fox Journal now ? can't be let go, that is the booby prize of the party.

August 8, 2008 at 4:49 am

Greedom

If Alexis can run on her blog a subject of this latest football agenda with players/picks etc... I'd like to see Liz Macdonald's 'picks' that is, role models. Favorite thinkers and why. forget the money/salaries, although the list may be people that are indeed involved in money. I suggest this because clearly Ms MacDonald has had some great directive advice, even if self derived ! Inquiring minds want to know ! ok ok - Fox can be tabloidish- but, I really do think it would be a valuable additive to current culture bake. I did see the Hardy reference I suppose... And that character is revealed through action was it ?

August 7, 2008 at 10:59 pm

Greedom

I didn't think the comments were too much.

August 7, 2008 at 10:30 pm

Chance Gardiner

quoted quote from article: “My sense is that Lehman feels a need to take action now to stop, for once and, hopefully, for all, the constant stories and rumors swirling around the company,” Richard Bove says... I say - come on ! Bear Stearns didn't die over a weekend because of rumors, and besides, Schwartz told us face to face that any downsides to Bear Sterans were due to speculation. Why should Lehman all of a sudden pretend it can't - like Bobby Fischer - Disappear over a weekend. Always someone scrambling. Watching top scramblers often leads you to what's not on the books formally - I WAGER. I wonder who's fidgeting in their seat over at Lehman, because I can forget them, I know Lehman will assist in finding them new employment, I really want to know who's not in their seats over at Lehman and what kind of liquidation pre-Bad BS weekend fears are ocurring. Maybe Bernanke should call up Bear Stearns Schwartz and oranize a real nice 1 weekend event for all BS employees and all Lehman Bros. employees to 'chat'. Hey, at some point ? I bet people start to show up saying - hey hey hey don't crash and burn, take your 20 cents on the dollar and join 9 other chum bait corporations that would otherwise have failed, until the junk consortium rescued them ! the JC could do it. Set up a participative conglomerate acting with atomicity but rendered always to subjegate entities - those being the Bear Stearns of the world. Bernanke perhaps carries over a non-social or anti-social element, because consortium if you ask me ? can keep some of these lead sinkers alive. I can picture Dr Zoidberg showing up out of nowhere going "Whaaayat ? Is this an open buffet for consolidative vertical movement in the financial sectors or whaaaayaat ? - hey, where did everybody go ? " Where oh where is thy consolidative move rather than immediate jump and go to Fed bailout line, whether through treasury pipes or flat out bonus corporate welfare check, signed sealed delivered - and hey LLC what's up LLC - it's yours if you're a corporation on the side of the tracks that can reach into the newly opened window as of late - first time since - ouch ! when those tracks were laid. Airlines almost immediatly go condolidative I observe, yet the financials are always feared to be left for dead to die in the desert - probably in the last moments before death going 'what the heck am I doing in the desert right now ? '

August 6, 2008 at 7:50 pm

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

browse posts

most popular posts