American Express Sweetens Bid for Rest of Shearson

American Express Co. on Tuesday signed a final agreement to buy the 30% of Shearson Lehman Hutton’s publicly traded stock it doesn’t own, even as a credit-rating agency warned that big charges against earnings may again threaten the troubled brokerage’s stability.

American Express said that, under the final terms of the deal, it will swap 0.48 share of its own stock for each Shearson share, sweetening by 12.7% an earlier offer of 0.426 share. American Express said it also, as expected, gave Shearson an infusion of $750 million in equity capital.

But Jeffrey Bowman, a vice president at Standard & Poor’s Corp., said an internal S&P; study suggests that Shearson may need to take a pretax charge of as much as $700 million to cover the cost of its planned reorganization and to increase reserves against losses at its Balcor real estate subsidiary.

He said the size of the charge raises questions about whether the $750 million would be sufficient to protect Shearson from a credit downgrading. “If they took the whole charge in the first quarter, we’d have to reassess the adequacy of their capital base,” Bowman said.

A $700-million quarterly charge would be the largest in Wall Street’s history, outstripping the $470-million charge taken by Merrill Lynch in the fourth quarter of last year.

American Express wouldn’t comment on the Standard & Poor’s analysis, saying the company is still studying how much needs to be cut and what charges will be needed. A spokesman, Matthew Stover, said American Express will disclose its reorganization plan within the next several weeks.

Still, some analysts thought the $700-million estimate was probably high. “I don’t think people yet have a good feel for what is needed,” said Samuel G. Liss, an analyst with the Salomon Bros. investment firm in New York.

Weakened by a slowdown in a number of key businesses, Shearson has said it will lay off 2,000 employees, close 50 branch offices and pare other operations.

Such actions would require huge amounts of cash to cover severance payments, branch closings and the costs of renegotiating leases. But the charges may also include sums that are nearly as large to cover losses in Shearson’s real estate portfolio.

American Express has been forced to put $1.35 billion in cash and stock into Shearson to prevent a credit downgrading. The financial services firm decided to purchase the rest of Shearson last month after it became apparent that an earlier plan to cut American Express’ stake in the No. 2 brokerage wouldn’t work.

Stover of American Express said the company had decided to sweeten its offer for Shearson on the advice of a special committee of outside Shearson directors that was convened to consider the price issue.

American Express didn’t need to pay a large “control premium” to the public shareholders, since it already held a 61% stake. But “it does gives us a little extra latitude in running the company, and it was thought something should be added (to the price) to reflect that,” Stover said.

The sweetened offer also removed the opposition of some shareholders who had sued to oppose the merger. American Express said that under the deal, the shareholders have agreed to drop their class-action suits.

In composite trading on the New York Stock Exchange, American Express lost 25 cents a share to close at $26.625, just above its 52-week low, on heavy volume of 2.52 million shares. It was the most actively traded issue Tuesday on the NYSE. Shearson shares closed at $12.50, up $1.25, on volume of 644,200 shares.