Sept. 11 (Bloomberg) -- Richard Fuld's plan to keep Lehman Brothers Holdings Inc. afloat depends on whether the chief executive officer can sell a business that he'd rather keep to a buyer who may not be able to pay for it.

Lehman told investors yesterday it will auction off a 55 percent stake in its asset-management unit, which oversees $277 billion, including funds run by Neuberger Berman LLC. Private-equity firms KKR & Co. LP, Bain Capital LLC, Hellman & Friedman LLC and Clayton, Dubilier & Rice Inc. may make bids valuing the unit at about $5 billion, according to people familiar with the negotiations. That's about 60 percent more than Lehman's market capitalization after the stock fell today as much as 47 percent.

Losses of $6.7 billion in the past two quarters and a drop of more than 90 percent in Lehman's stock since the start of the year forced Fuld to put the division up for sale even though prices for fund companies are at the lowest since 2002. The lack of financing for leveraged buyouts will make it harder for the New York-based securities firm to pull off a deal.

``Fuld doesn't want to let it go,'' said Bruce Foerster, a former Lehman executive who is president of South Beach Capital Markets in Miami. ``He went out of his way to buy it and he knows it's a good asset.''

Financing Concerns

An LBO of the fund unit will test the buyer's ability to finance a takeover as investment banks remain skittish about committing debt to new deals. Blackstone Group LP President Tony James said Sept. 9 that financing for deals worth more than $5 billion was difficult to arrange. The value of announced private-equity deals worldwide has dropped 70 percent to $193 billion in 2008 from a year earlier, according to data compiled by Bloomberg.

``Unless it's a fire sale, where do they get leverage to get their return?'' said Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island. ``I don't think there is any one who will lend them that kind of money in today's market.''

Lehman didn't name potential bidders for the unit in a statement or conference call with investors yesterday. The Lehman sale doesn't include the firm's holdings in hedge funds such as GLG Partners Inc. and the institutional brokerage inside the unit. Officials at the private-equity firms and Lehman declined to comment.

Fuld sought a buyer for the whole firm today after Moody's Investor Service said the company must find a ``stronger financial partner'' and the shares fell. Bank of America Corp. is among the potential buyers, the Wall Street Journal reported, citing unidentified people.

Lehman's asset-management unit earned $361 million on $2.3 billion of revenue this year through August, according to a Sanford Bernstein research note at that time. The report valued the unit at $7 billion, including the hedge-fund stakes.

Ratings Cut Looms

Even a successful sale may not be enough to satisfy credit- rating companies. Moody's Investors Service said it was reviewing its ratings for Lehman, and may lower them if the firm fails to reach a ``strategic arrangement.''

``A strategic transaction with a stronger financial partner would likely add support to the ratings,'' analyst Blaine Frantz said in a Moody's statement yesterday.

Lehman fell $3.03, or 42 percent, to $4.22 at 4 p.m. in New York Stock Exchange trading after four analysts cut their recommendations because of the possible ratings change. The stock dropped as low as $3.79 earlier in the day.

Private-equity firms including Carlyle Group and Blackstone decided against making offers for the unit, according to people familiar with the process who declined to be identified because the talks were confidential.

KKR, Bain, Hellman

KKR, the private-equity firm led by Henry Kravis and George Roberts, plans to convert to a public company listed on the New York Stock Exchange by the end of the year in a transaction that may give it a market value of as much as $15 billion.

A deal for the asset-management firm might bolster its case to investors that it can expand beyond LBOs. The firm earlier this year hired William Sonneborn from TCW Group to head its asset-management efforts.

``That would help the rationale for KKR going public in these markets,'' said Jackson Turner, an analyst with Argus Research in New York who follows publicly traded private-equity firms including Blackstone. ``KKR's motivation is stronger because acquiring Neuberger Berman would put to rest doubts about why they chose to go public.''

Bain, founded in 1984, manages more than $78 billion in assets. The firm's investments include Clear Channel Communications Inc. and HD Supply Inc., as well as the Weather Channel, which it bought this year with NBC Universal and Blackstone for about $3.5 billion, among the biggest LBOs of 2008.

Hellman's Investments

Hellman & Friedman, founded by Warren Hellman in 1984, has invested in fund managers including Grosvenor Capital Management LP. Hellman also helped create Farallon Capital Management LLC, the San Francisco-based alternative asset manager founded by Thomas Steyer.

Founded in 1978, Clayton Dubilier has invested more than $11 billion, mostly in industrial companies or so-called carve- outs from larger companies. With Bain and Carlyle, the New York- based firm is an owner of HD Supply.

In the case of Lehman, the would-be buyers may overcome the debt-market conditions by offering a cheap price to a seller under increasing pressure to act. They may also find a group of managers eager to escape the speculation surrounding Lehman and ready to make their way at an independent firm.

`Under Stress'

Revenue in the investment-management unit dropped 21 percent in the third quarter, half the 43 percent decline in investment banking, Lehman said yesterday when it outlined its preliminary results.

Chief Financial Officer Ian Lowitt told investors on a conference call Lehman expected to gain at least $3 billion as a result of the goodwill associated with the sale.

Lehman bought Neuberger in 2003 for $2.6 billion. The investment-management division, which also includes separate accounts for wealthy investors and private-equity funds, had revenue of $634 million in third quarter, down from $802 million from the same period a year earlier.

Fuld, 62, is seeking to salvage some of the unit's profits by keeping a minority stake. The CEO personally called bankers at rival securities firms in recent weeks to ensure they would continue to trade with Lehman and extend the firm credit, the Wall Street Journal reported, citing people familiar with the calls.

``You have a seller who's under stress,'' said Eric Weber, a managing director of New York-based Freeman & Co., a financial-services consulting firm. ``In this scenario, Lehman gets some of its capital, some cash to shore up its capital base and still have a seat at the table.''

Layoffs Possible

Lehman reported a $3.9 billion third-quarter loss yesterday, the largest in its 158-year history. In addition to the asset-management sale, Lehman plans to spin off commercial real-estate holdings and cut the dividend to boost capital in an attempt to regain investors' confidence.

The firm may have to cut as many as 8,000 of its 24,000 jobs to continue operating as an independent company, the New York Post reported today, citing estimates by unidentified people.

Private-equity firms are attracted to traditional asset managers for their steady income streams and revenue.

TPG Inc. earlier this year bought the mutual-fund unit of American Airlines parent AMR Corp. for $480 million. Madison Dearborn Partners LLC last year agreed to buy Nuveen Investments Inc. for $5.75 billion, the largest LBO of an asset manager.

Valuations Fall

Private-equity companies invested in 33 asset managers from Aug. 1 of last year, when LBOs started to dwindle, to June of this year, a 10 percent gain from the same period a year earlier, according to Jefferies Putnam Lovell, a unit of New York-based Jefferies Group Inc. In the same period, private- equity deals across all industries fell 12 percent to 2,188, data compiled by Bloomberg show.

Part of the attraction is the relative cheapness of asset managers, as measured by the ratio of stock prices to earnings. A basket of 50 companies worldwide traded at an average of 11 times earnings in the second quarter, meaning investors were willing to pay $11 for each $1 of operating profit. That's down from 17.7 times in the second quarter of 2003, according to Putnam Lovell. The valuation for the group hasn't been lower since 2002, according to the research.

With a deal the size of Lehman's business, a private-equity buyer might model the transaction on those of rival investment banks including Merrill Lynch & Co., which provided some financing to buyers of its assets including Lone Star Funds, Freeman's Weber said. That would limit the amount of money a buyout shop would need to borrow, he said.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

Last Updated: September 11, 2008 16:58 EDT