American Express said Monday that its board has approved an initial public offering of 18% of the shares of its Shearson Lehman Bros. brokerage unit in a deal that could bring in more than $700 million in new capital to American Express.
The announcement, which was widely expected, came four days after American Express agreed to sell preferred stock convertible into 13% of Shearson to Nippon Life Insurance, Japan's largest life insurance firm.
American Express, which also on Monday approved an offering of 8.5% of Shearson to its employees, will as a result retain ownership of about 60% of Shearson. Shearson is the nation's third-largest investment house.
The multiple offerings reflect Shearson's need for capital to compete in highly competitive world securities markets. Shearson, which has capital of about $2.8 billion, is increasingly committing its own capital in mergers and other securities deals, a trend among Wall Street firms.
"To the extent they have a stronger capital base, they have a stronger ability to compete in a broader playing field," American Express spokesman Walter Montgomery said.
The offering also will reduce American Express' exposure to Shearson while letting it retain a controlling interest. American Express might use capital from the offering to finance acquisitions of other brokerages, some analysts have speculated.
The firm has been in talks about acquiring E. F. Hutton and Paine Webber. Sources close to American Express said Monday that it will retain funds from the initial public offering, while Shearson will get the funds realized from selling stakes to Nippon Life and Shearson staff.
The offerings also could signal a trend for other companies to spin off large chunks of their brokerage units, said Joseph T. Arsenio II, director of research at the San Francisco-based brokerage of Birr, Wilson Securities. Sears, Roebuck may spin off part of its Dean Witter securities unit, or Prudential Insurance may do likewise with its Prudential-Bache Securities unit, Arsenio suggested.
Montgomery said the value of the public offering and the offering price is as yet undetermined. But, based on the $538 million that Nippon Life will pay for its 13% stake, the offering's value will be about $745 million, assuming equivalent per-share prices.
American Express said it has no plans to sell additional shares of Shearson, Montgomery said. After Nippon Life converts its preferred shares, Shearson will have about 100 million shares outstanding, of which 18 million will be held by the public, American Express said.
In another action Monday, American Express declared a 2-for-1 stock split and raised its quarterly dividend to 38 cents per share from 36 cents on a pre-split basis. Separately, American Express said it approved an agreement among itself, Shearson and Nippon Life to form a finance and investment venture in London.