Barclays a step closer on Lehman deal; eyes more assets

NEW YORK/LONDON (Reuters) - British bank Barclays Plc (BARC.L) is one step closer to acquiring Lehman Brothers' LEH.N LEH.P core U.S. business in a $1.75 billion deal, after a U.S. Judge approved bid procedures for the sale on Wednesday.

While the sale still needs court approval to be completed, U.S. bankruptcy Judge James Peck approved a $100 million break-up fee for Barclays if the deal falls through and scheduled a sale hearing for Friday.

The judge also indicated he would approve $450 million in interim debtor-in-possession financing that Lehman is seeking from Barclays to fund operations as it hurries to complete the sale.

"There is effectively one logical purchaser for these assets," Peck told a packed court room in Manhattan, adding that the sale was an "extraordinary" circumstance, that needed to be expedited for the sake of the global markets.

During the hearing, representatives from the U.S. Securities and Exchange Commission, Federal Reserve, and Commodities & Futures Trading Commission said they supported the bid procedures.

Earlier on Wednesday, Barclays also said in addition to the $1.75 billion offer it could also acquire some additional Lehman businesses in Europe or Asia.

John Varley, Barclays chief executive, said the bank had "opportunities but not the obligation" to buy more Lehman assets, after the U.S. investment bank filed for bankruptcy protection on Monday.

"We now have the opportunity, and it's an opportunity that we're looking at quickly and seriously, to see what else might fit with the businesses we're developing around the world," Varley told analysts on a conference call.

Bob Diamond, head of Barclays Capital, added: "It would most typically be around those areas where Lehman has strong positions and BarCap has a weak one, so mostly around equities and the equity capital markets business."

He said an example would be Lehman's cash equities, where he "wouldn't want to miss the opportunity to add some of the talent from the UK and Europe to that (U.S.) team."

Meanwhile, CNBC reported that Lehman may sell its investment management division as soon as Wednesday.

Barclays' proposed U.S. purchase includes Lehman's North American sales, trading, and research and investment banking businesses, as well as its midtown Manhattan headquarters and two New Jersey data centers and could save about 10,000 jobs at Lehman.

According to court documents, U.S. employees of the firm will have the opportunity to continue their employment with Barclays on the same terms through December 31, 2008 and Barclays will assume an estimated $2.5 billion in liabilities linked to the potential cost of severance for Lehman employees.

If the deal does not go through, Lehman can pay Barclays a break-up fee of $100 million plus up to $25 million for expenses, according to court documents. If another bidder emerges for Lehman, they would have to bid at least $1.875 billion for those assets, according to the bid protections.

For Barclays, the deal will have an immediate positive impact, expected to add to earnings in the first year, and will provide a "very high" return on investment, Varley said.

The deal would also lift Barclays' capital ratio, even before the bank completes a planned capital injection alongside the deal, because of a negative goodwill adjustment from the deal amounting to about $2 billion after tax.

The bank said existing shareholders had expressed support for the deal and were expected to buy additional equity of at least 600 million pounds ($1.1 billion) into the bank.

In court filings, Lehman said Barclays has also agreed to buy 50 percent of each position in residential real estate mortgage securities at its Lehman Brothers Inc unit.

Lazard acted as financial adviser to Lehman Brothers in the sale of assets to Barclays.

For its continuing bankruptcy case, Lehman also intends to hire financial advisory firm Alvarez & Marsal and appoint restructuring expert Bryan Marsal as chief restructuring officer, a Lehman lawyer said at the hearing.

(Reporting by Steve Slater in London, Emily Chasan, Dan Wilchins, and Paritosh Bansal in New York; Editing Bernard Orr)