Tuesday, March 2, 2010

Lazard Ltd Quick Comment: 10K Calls Out Share Overhang; Sizing Fees From Prudential Deal

What's new: Two events affecting LAZ occurred over the past few days: 1) Prudential announced it agreed to buy AIA Group for $35.5 billion; Lazard is advising Prudential and Business Week reported investment banks fees from the deal could total $660 million. 2) Lazard published its 10-K yesterday; in the risks section, the company highlighted that a large number of shares become available for sale in ‘10, disclosure that had not been included in 10-K’s for prior years. Note EPS estimates are based on fully exchanged shares, thus there should not be an impact to earnings estimates.

Prudential a good-sized fee for LAZ: While we believe that the Prudential deal will be important for Lazard when the deal closes (Dealogic estimates $13mm advisory fee for LAZ on the M&A portion), the fee is comparable to other medium- to large-sized deals (to put into context, we forecast LAZ generating $748mm of M&A advisory revenue in 2010). In addition, while there could be fee upside on the Pru deal if LAZ is able to get paid for capital structure advice, it is highly unlikely that LAZ will receives fees of the same magnitude as those underwriting the rights offering.

Potential share overhang: In its 10-K, LAZ noted that there are 35mm (40% of outstanding) shares that may become eligible for sale in 2010. The shares include: a) ~18.7mm shares underlying LAZ-MD exchangeable interest; b) ~4.3mm RSUs expected to vest in March 2010; c) ~8.3mm concurrently issuable with the LAZ-MD exchangeable interests; d) ~2.2mm previously issued for LAZ-MD exchangeable interests; and e) ~1.8mm shares held by the Wasserstein Estate and related trusts.

These shares are mostly already included in LAZ’s diluted share count assuming full exchange (metric analysts use for EPS estimates), but could pose an overhang if investors are concerned about all of them hitting the market in ‘10. For reference, LAZ insiders sold 10.9mm shares in secondary offerings in ‘09.

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