Shearson Plans to Boost Capital by $887 Million : Securities: The Wall St. firm hopes to avert a lower credit rating. Parent American Express, wants more distance from Shearon’s results.
Moving to fortify a weakened balance sheet, Shearson Lehman Hutton said Wednesday that it will sell stock and notes through both public and private offerings to increase its capital by about $887 million, or about 17%.
The sales will avert a credit downgrading of Wall Street’s second-largest firm and achieve an important secondary goal of reducing the stake of its largest shareholder, American Express Co., to 42% from 61%. Shearson has been shaken by strategic missteps and tough market conditions in the past year, and two weeks ago it reshuffled its senior management.
Under a plan that has been weeks in preparation, Shearson will sell 20 million to 23 million new common shares, including 3 million to American Express. At Wednesday’s closing price of $14.75 a share, the sale, if successful, would raise at least $295 million.
American Express also plans to buy $250 million of Shearson preferred shares. The investment firm plans to place with institutional investors a $150-million block of convertible preferred stock and a $150-million block of subordinated debt.
The big brokerage will gain additional capital by selling its Ayco subsidiary, which offers financial planning services to executives, to American Express, for $56 million. That sale will add about $42 million in equity to Shearson’s balance sheet.
In all, the sales will add at least $887 million to Shearson’s capital and $737 million to its shareholders’ equity, or net worth.
Moody’s Investors Service, which threatened to cut Shearson’s credit rating about a month ago, said it was confirming the firm’s current rating. The agency said the recapitalization “will materially increase” Shearson’s net worth, going on to predict that the company “will continue to strengthen its capital base over time.”
Moody’s cited the firm’s plan to cut expenses, and its continuing alliance with American Express, as pluses. It added, however, that the difficult climate in the securities business, including competition, would be “constraints.” In threatening to cut Shearson’s ratings, Moody’s had cited the firm’s weak profits, low capital and investments in possibly vulnerable real estate properties, as well as the current industry slump.
Notably not a part of the recapitalization plan was Ronald O. Perelman, owner of cosmetics giant Revlon Inc., who was rumored to be near to an agreement to purchase a big block of stock in Shearson. Perelman, who is a close friend of American Express Chairman James Robinson, had “very preliminary” discussions with the two firms but had never been near a pact, sources said.
Despite the presence of the convertible preferred stock in the recapitalization plan, the move is not likely to produce major new shareholders with stakes of more than a couple of percent. The convertible preferred shares will probably be divided among about a dozen investors, rather than just one or two, sources said.
Nippon Mutual Life Insurance, now Shearson’s No. 2 holder with a 13% stake, will see its stake reduced by a few percentage points as well. The size of the reduction will depend on whether it purchases any of the new stock. Shearson currently has about 800 million shares outstanding.
American Express has sought to reduce its stake in Shearson below 50% so that the weakness of Shearson’s results does not reflect as heavily in its financial statements.
Shearson recently began laying off 800 employees to cut its total work force to 35,700 employees. The reorganization of its executive suite brought a demotion for Jeffrey Lane, who had been president, and promoted some younger executives.
Ayco, the financial planning unit, is expected to fit well with American Express’ big financial planning business, IDS Financial.
