What price Lehman Brothers?
A Korean bank wants to invest in the troubled U.S. broker. The question now is how low the price might go.
NEW YORK (Fortune) -- One of the most compelling dramas in New York's theater district this summer hinges on Lehman Brothers' courtship of a Korean bank.
Just a week after early enthusiasm over the reported talks dissipated, the head of Korea Development Bank, Min Euoo Sung, confirmed Monday that the state-owned institution was holding talks about investing in the troubled investment bank.
That's good news for Lehman (LEH, Fortune 500), because management has been scouring the world for a partner that can help bolster the firm's equity base, which is straining under the weight of almost $65 billion of commercial and residential real estate securities and loans.
Given that Lehman is understood to be nearly desperate for fresh cash from a new partner, though, the question is what kind of terms the KDB might be able to score.
The market values for most of its mortgage-related assets, especially the commercial real estate paper, have been dropping steadily. In turn, this has fueled speculation of yet another quarter of writedowns for the firm, with estimates putting a likely charge anywhere from $2.8 billion to $4 billion. Over the past year, Lehman has taken some $6 billion in writedowns.
At varying points in recent weeks, Lehman's management has sought to sell a stake in the profitable Neuberger Berman money management unit. Alternatively, management has sought a direct equity investment and, according to the Wall Street Journal, is contemplating a spinoff to shareholders of its real estate portfolio, though it's not clear how such a deal would be financed.
Lehman shareholders, who have seen their investment drop 75% this year, were granted a temporary reprieve on news of the talks with the Korean bank. In midday trading Tuesday, shares were changing hands at $16.70, up about 3.5%, though most of those gains were gone by day's end. At one point early last week the stock dropped below $14 as rumors about impending writedowns gained strength.
Published reports, while vague, state that KDB (possibly in conjunction with other Korean banks) would take as much as a 25% stake in the company for $6 billion. Lehman's current stock market capitalization is just $11.6 billion, meaning that KDB would be paying more than double the current market rate for Lehman equity.
That seems too good to be true, given the likelihood of near-term pain in Lehman's future combined with its management's proclivity for risky deployment of its balance sheet (examples: the $13.5 billion 2007 buyout of real estate investment trust Archstone-Smith, a large owner of apartments, and a disastrous foray into Southern California real estate development with Sun-Cal.).
Late this afternoon KDB's chief executive Sung, himself former head of Lehman's South Korean operations, told Bloomberg that negotiations have been held up over "differences over price."
Sung did not provide any details about when a deal might be struck, nor did he discuss what price level KDB thought was appropriate.
There do appear to be hurdles in Korea that must be surmounted for an investment of this scope to take place. According to a report in the New York Times, Jun Kwang-woo, head of the country's Financial Services Commission, expressed doubts last month that public-sector funds should assume a lead role in such a venture. Another report did note, however, that the FSC would keep a neutral stance on the matter until they saw the terms of any transaction.
A Lehman spokesman declined comment. But the firm's perceived eagernness to do a deal before mid-September, when it's due to unveil its latest round of dour earnings news, could mean that a deal with KDB will give Fuld another chance to resuscitate Lehman - but at the cost of another hit to current shareholders. 
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