Thursday, September 11, 2008

Merrill Lynch on Lehman (NYSE:LEH): Going to No Opinion

Merrill Lynch on Lehman (NYSE:LEH):

Firm is changing their opinion on LEH to "No Opinion" because Moody’s has stated definitively that LEH will be downgraded to Baa absent a strategic partner within an unspecified, but very short, time. In their view, this puts LEH in play. While the number of potential acquirers at this point is, they believe, very few (they cannot really name any with any degree of comfort), Moody’s action certainly raises specter of takeout, potentially at a very low price.

“Take-under” threat makes analytical valuation difficult

Firm estimates EPS potential in weak environment with LEH at Baa at $1.33 in ‘09, ROE of 4 - 5%. MLCO estimates "worst case" Book Value at $15.10, assuming another large net loss ($2.4bn), sale of Neuberger for no gain, and another dilutive capital raise to regain 13% Tier 1 ($3.8bn at $6/share). However, with potential for “take-under” amid rapidly unfolding events, it is very difficult to determine a price objective with any degree of confidence. For this reason, they are taking this "No opinion" action.

Notablecalls: Note that both Citigroup and Goldman Sachs are downgrading Lehman this AM

PS: Today is 911. We can't close in red, guys.

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