Legg Mason reports loss of nearly $454 million

Legg Mason Inc. reported Friday a $453.9 million loss for the third quarter, following a previously announced $734 million writedown of certain assets.

On a per-share basis, the Baltimore-based money manager lost $3.45. For the corresponding quarter a year ago, the company earned $28.1 million or 20 cents per share.


Legg, which has been operating without a permanent CEO for four months, continued to see investor dollars flow out of its funds in the quarter ended Dec. 31.

The stock fell more than 3 percent Friday, closing at $26.79 per share, down 86 cents.


Greggory Warren, senior stock analyst with Morningstar Inc., said investors were disappointed by mutual fund flows, among other things. The latest quarter illustrates how far Legg must go to return to its heyday in 2007, when it managed more than $1 trillion in assets, he said. Assets under management in December totaled $648.9 billion.

"You don't get into the situation they got into and get out of it in a hurry," Warren said. "It's a long road."

Interim CEO Joseph A. Sullivan told analysts in a conference call Friday that "challenges remain," but he said he is optimistic about the company's prospects. He said the search for a permanent CEO, which involved a large number of candidates, is nearly over and an announcement would be made in the "not-too-distant future."

Chairman and CEO Mark R. Fetting stepped down in October after having been unable to revive Legg's stock price or stop the outflow of money from funds.

Legg's quarterly loss is the second in the past nine months. Last summer, Legg lost $9.5 million related to the costs of refinancing debt and launching two funds.

The loss for the October-December quarter followed a noncash impairment charge of $734 million, or $508 million after taxes, after revising the value of contracts acquired in Legg's Permal and Citigroup deals in 2005. Legg, announcing the charge in December, said it reduced the value given recent outflows, a reduction in projected growth rates, stock price uncertainty and the ongoing search for a permanent CEO.

Earnings were further dampened by $9.2 million in tax expenses in the quarter.

Revenue totaled $673.9 million, up 7 percent over the same quarter a year ago.

Assets under management at the end of December were down $1.8 billion from $650.7 billion three months earlier. Investors pulled $7.5 billion out of the funds during the third quarter, which was offset by market gains of $5.7 billion.

Sullivan told analysts that January's flow results are mixed. Legg had its best month in years in terms of investment dollars coming in from U.S. individuals but lost about $1 billion of institutional money, he said.

Sullivan said the investment performance of Legg's affiliates has improved and that the company received approval from the Securities and Exchange Commission to launch an actively managed exchange-traded fund.

Sullivan said Legg expects to complete the acquisition of European money manager Fauchier Partners, announced in December, in the current quarter. Fauchier will be merged into Legg's New York affiliate, Permal.


Macrae Sykes, an analyst with Gabelli & Co. in Rye, N.Y., said Legg's earnings results were in line with what he expected. Sykes has a "buy" recommendation on Legg stock, saying the company is selling at a good price and "generates significant cash flow, which they are using to buy back shares."

Investment performance has gotten better at its fixed-income affiliates, he noted, though that hasn't translated yet into better inflow of investor dollars. "It's an ongoing turnaround," he said.

Sykes said it will be good once Legg announces a permanent CEO and eliminates uncertainty over who will lead the company.

The search for a CEO has generated widespread speculation. Given all the moves Sullivan has made lately, he appears to be the favored candidate, Morningstar's Warren said.

"He's got a good relationship with the affiliates. He seems to be getting things done," Warren said. "This has been his interview over the last few months."


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