Legg gets cash infusion

The Baltimore Sun

Legg Mason Inc. announced yesterday that it has sold $1.25 billion in senior notes to private equity firm Kohlberg Kravis Roberts & Co. to shore up the Baltimore money manager's balance sheet and buy back shares from Citigroup Inc.

Legg said the additional liquidity would be used for general corporate purposes, such as to finance acquisitions.

It also will be used to repurchase - and then retire - 2.5 million Legg shares owned by Citigroup. Legg Mason swapped its brokerage operation for Citigroup's money management unit more than two years ago, which has yielded mixed results.

Legg Mason in recent months has faced a series of setbacks as clients pulled billions of dollars from its mutual funds. Fallout from the subprime credit market forced the company last month to reduce its holdings of structured investment vehicles. And its stock fell 25 percent last year.

Legg sold KKR senior notes at 2.5 percent interest that are due in 2015. The notes will be convertible to cash or stock or a combination of both.

Assuming that debt is converted into stock, KKR could have a nearly 9 percent stake in Legg Mason, making it one of the company's top shareholders. The firm has about 145 million outstanding shares.

"We have materially increased the company's liquidity, which enables us to better manage in a volatile marketplace, as well as to position the firm for future growth," Legg's Chairman and Chief Executive Officer Raymond A. "Chip" Mason said in a statement.

"We carefully considered a number of options with a number of institutions, including accessing the public markets and decided that this ... was the best option for our company and for our shareholders."

As part of the transaction, Legg will recommend that KKR's Scott C. Nuttall be elected to its board of directors, the firm said. And KKR has agreed it would not purchase Legg Mason stock without its permission.

Nuttall said in a statement that KKR has a "track record of investing in strong financial services companies with a focus on long-term value. ... "

Legg Mason last month assumed the biggest bailout by a money manager related to debt sold by structured investment vehicles (SIVs). In doing so, Legg said it would take a $90 million charge related to such costs in the fiscal third quarter.

The company said yesterday that it expected earnings for its fiscal third quarter, which ended Dec. 31, to fall as much as 14 percent, compared with the quarter a year ago, because of costs to shore up its money funds.

Net income for the quarter is expected to be between $1.04 per diluted share and $1.09 per diluted share, down from $1.21.

Shares of Legg Mason rose 72 cents to close yesterday to $72.36 on the New York Stock Exchange. The KKR announcement was made after financial markets closed.


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