IS SHEARSON ON THE BLOCK, TOO?
For months, rumors have been swirling that American Express Co. was about to put its Shearson Lehman Brothers Inc. subsidiary on the block. The move would fit with AmEx' overall strategy to beef up its balance sheet and get back to its basic card business. On Aug. 6, the speculation took on greater weight: AmEx disclosed it was trying to sell Boston Co., Shearson's private-banking and asset-management division.
The Street believes that the sale of Boston Co. would be a precursor to shedding Shearson. "I see selling Boston Co. as just another step toward the certain divestiture or spin-off of the whole Shearson Lehman shebang," says E. Wilson Davis, an analyst at Gerard Klauer Mattison & Co. "It would help AmEx' stock price and their financial situation."
AmEx insists that Shearson is a keeper. Both AmEx and Shearson officials say that a spin-off or sale is not being discussed. Says Howard L. Clark Jr., the CEO of Shearson Lehman Holdings Inc.: "We're a big factor in the overall earnings power of the company, which is a very different scenario than the late 1980s."
Shearson has indeed turned the profit corner and is adding to AmEx' bottom line. But, as one rating-agency analyst says: "It doesn't make sense for AmEx to be in Shearson's business. There are no synergies between the card and the brokerage business."
DOUBLE BOOST. Selling Boston Co. would make it a lot easier for AmEx to divest itself of Shearson through a spin-off or sale. Right now, Shearson is undercapitalized. True, the firm has doubled its ratio of tangible equity, from just 0.8% of assets in January, 1990, to 1.6% in the second quarter of 1992. But that's woefully below the 4.2% of a well-capitalized firm such as Merrill Lynch & Co. And Shearson's $1.3 billion in equity falls $700 million short of what is required for the firm to earn an A bond rating. Brokerages need at least that, both to maintain customer confidence and to borrow at favorable rates.
So if AmEx sells Boston Co. for $1.3 billion, as expected on the Street, Shearson's balance sheet would get a double-barreled boost. After subtracting debt, Shearson's equity would jump by some $200 million, according to Sanford C. Bernstein & Co.'s Guy Moszkowski. At the same time, Shearson's $81 billion in assets would shrink by Boston Co.'s $8.4 billion. The effect would be to increase its equity-to-assets ratio to 2%, within striking distance of a stand-alone, single-A rating, says Moszkowski. Then, says Gerard's Davis, AmEx could fetch some $500 million to $600 million in a public offering for a third of the firm.
That's a far cry from the sad shape Shearson was in just two and a half years ago. To shore up its crumbling balance sheet, AmEx tried to sell 20 million shares of Shearson's stock at about $13 a share. But the public turned thumbs down. AmEx ended up buying Shearson's outstanding stock and owning the whole company. In January, 1990, AmEx CEO James D. Robinson III installed Clark as CEO and, in short order, pumped $1 billion into the brokerage, cut 2,300 employees, and slashed costs by $400 million.
But Shearson needed a lot more help. In the second quarter of 1991, Shearson took a $144 million write-off for its 28% stake in First Capital Holdings Corp., a failed California insurer. And AmEx also transferred $1.5 billion in assets of Shearson's Balcor Co. real estate unit onto AmEx' own books. Then last month, AmEx had to take a $300 million reserve for losses at Balcor (table).
BIDDERS. On Aug. 13, Shearson is expected to remove another nagging liability from its balance sheet: the $500 million bridge loan it made two years ago for the ill-fated leveraged buyout of Prime Computer Inc. Shearson is scheduled to sell $300 million in stock in Computervision Corp., the only remaining unit of Prime Computer, as well as $300 million in high-yield debt. If the offering succeeds, Shearson will have converted the $500 million bridge loan to cash and Computervision stock. "The offering will allow Shearson to take a large, illiquid asset off our books," says Clark.
Shearson is now negotiating with three finalists,Chase Manhattan, PNC Financial, and Mellon Bank, for the purchase of Boston Co. AmEx says it won't take less than a premium price for what it considers a classy asset. Boston Co. generates a steady stream of fees from its trust and mutual-fund business, which makes up most of its estimated 1992 earnings of some $130 million to $150 million. Moreover, Boston Co. owns a rock-solid bank, Boston Safe Deposit & Trust Co. The bank's capital-to-asset ratio is almost twice what the Federal Deposit Insurance Corp. requires.
AmEx shareholders would welcome a Shearson sale. After trading as high as 37 in 1989, AmEx' stock is now at 22. "If the Shearson sale happened next week, AmEx' stock would rocket," says Gerard's Davis. "We would have a much simpler, comprehensible company--just TRS and IDS," referring to Travel Related Services, the AmEx card division, and IDS Financial Services Inc., its financial planning unit.
Floating a public issue of Shearson stock would not be easy. The Street hasn't forgotten the failed 1990 offering, the IPO market is not as robust as it was earlier this year, and Shearson's operating results continue to lag the industry. Still, the stock market remains strong and brokerages are racking up record profits. With Shearson's balance sheet in far better shape, AmEx may finally be able to cut its brokerage business loose.CLEANING UP THE BALANCE SHEET
A $600 million equity and debt offering is scheduled for the week of Aug. 10.
It would wipe out Prime Computer bridge loan from Shearson's balance sheet
On Aug. 6, Shearson announced it may sell this unit.
If it fetches $1.3 billion, as expected, Shearson's tangible equity would
In July, AmEx set aside reserves of $300 million for the former Shearson real
estate unit now on AmEx' books
DATA: SHEARSON LEHMAN BROTHERS INC., BW
Leah Nathans Spiro in New York, with Geoffrey Smith and Gary McWilliams in Boston