There's Pain In Amex' Gain

On the surface, the hefty deal struck by American Express Co. for its Boston Co. unit seems like a windfall. On Sept. 14, Pittsburgh-based Mellon Bank Corp. agreed to cough up $1.45 billion for the old-line private bank and money-management firm. Thanks to a bidding war, the price tag is a cool $100 million higher than AmEx's asking price.

A closer look reveals that AmEx did less well than appearances suggest. To get the deal done, it had to clean up Boston Co.'s balance sheet. AmEx is assuming well over $100 million in problem Boston Co. assets that could result in a write-off for the card giant after the deal closes early next year.

NORTHERN EXPOSURE. AmEx agreed to transfer to its books a $100 million investment Boston Co. made in three New York office buildings owned by Canada's Olympia & York Developments Ltd. In the late '80s, Boston Co. invested in three collateralized mortgage obligations on the properties worth $132 million. After the O&Y empire collapsed, Boston Co. wrote off $15 million in losses on the CMOs. AmEx says the CMOs are secured by the rents, which are current, and the properties themselves. "They're being carried at fair value," says an AmEx spokesperson. But the risk is that O&Y will cut rent payments or that the buildings will decline in value.

AmEx also will keep a portfolio of British jumbo mortgages worth "in the low tens of millions," says an AmEx spokesperson. Mellon and AmEx agreed to split any losses from the portfolio.

Despite these concessions, Amex should still come out a winner. If regulators approve the sale, AmEx expects to post a $250 million boost to the tangible net worth of its Shearson Lehman Brothers Inc. brokerage, which is Boston Co.'s immediate parent. Many analysts believe a stronger Shearson means AmEx has a better chance of reaching its long-term goal of finding a buyer for the brokerage (BW--Aug. 24). Says Dean Witter Reynolds Inc. analyst Michael Lewis: "They may have had to eat some problems, but they also increased their options with Shearson."

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