NEW YORK — Moving to create a stock brokerage powerhouse that will rival industry giant Merrill Lynch & Co., Primerica Corp. on Friday agreed to buy Shearson Lehman Bros.' retail brokerage and money management businesses from American Express Co. for $1 billion.
Under the proposed transaction, the Shearson units will be merged with Primerica's Smith Barney, Harris Upham & Co. brokerage. The combined operation, to be known as Smith Barney Shearson, will have about 10,900 brokers and more than 500 branch offices. Merrill Lynch has about 11,600 brokers and 510 branches.
The deal will relieve American Express of an albatross it acquired in 1981 as part of former Chairman and Chief Executive James D. Robinson III's ill-fated quest to turn American Express into a "financial supermarket." Robinson quit last month under pressure from disgruntled American Express shareholders.
American Express will retain Shearson's Lehman Bros.' investment banking operation with an eye toward rehabilitating it and eventually selling all or part of it to either the public or another company.
Smith Barney Shearson is expected to slash thousands of jobs, primarily in the combined company's headquarters staff and back-office operations. Smith Barney will bring 7,500 employees to the merger, and the Shearson operations will contribute 17,000.
"You'll see the most consolidation in the back office," said Frank G. Zarb, chairman and chief executive of Smith Barney, who will run the combined operation. "But brokers won't be affected and most offices will stay open."
The deal will allow Primerica Chairman and Chief Executive Sanford I. Weill to regain control of Shearson, a firm he began building in 1960 but sold to American Express in 1981. Weill joined Amex in 1981 but left in 1985 after clashing repeatedly with Robinson.
"The negotiations began after Jim Robinson left," Harvey Golub, Robinson's successor as chief executive of Amex, said during a telephone press conference.
"With this transaction, Smith Barney takes a quantum leap forward in achieving what would have required years to develop internally," Weill said in a statement, adding: "It is a pleasure for me to be reunited with so many old friends."
But some analysts noted that creating a retail mega-brokerage could prove risky.
"Sandy Weill has made a billion-dollar bet on the traditional brokerage business at a time when many people are saying that discount brokerages and mutual funds are the wave of the future," said Kieran Beer, managing editor of the Wall Street Letter, a weekly trade publication.
Observers said Weill is banking on the assumption that Smith Barney Shearson's sales force, second in size only to Merrill Lynch's, will become an increasingly valuable asset as financial products and services continue to proliferate, and confused baby boomers seek financial security.
"If our industry was bewildering 20 years ago, it's even more bewildering today," said Seth Gersch, managing director and chief administrative officer of Montgomery Securities in San Francisco. "Sandy understands that the average consumer needs sales people to help them through the thicket."
"This gives Sandy a major distribution network through which he can push all kinds of products and services," added Perrin H. Long Jr., director of equity research at First of Michigan Corp., a Detroit-based brokerage firm.
Weill knows that "the key to any operation is its sales force," said Frank Suozzo, an analyst with S.G. Warburg & Co.
Under terms of the agreement, Primerica will pay American Express $850 million in cash, $125 million in Primerica convertible preferred stock and $25 million in common equity warrants.
Primerica said it also agreed to pay out future contingent amounts based on the new unit's performance. The payments will consist of up to $50 million annually for three years, which Amex head Golub said were certain to be paid, plus 10% of after-tax profit in excess of $250 million per year over a five-year period.
Amex, however, would still be on the hook for millions of dollars in litigation claims relating to ill-fated partnerships and tax-shelters Shearson created and marketed to its customers. Litigation costs related to wrongdoing by Shearson's retail brokerage network will be absorbed by a $50-million reserve Amex is transferring to Primerica. If costs exceed $50 million, the balance will be split 50-50 by Amex and Primerica.
Golub said the sale of the brokerage would allow his company to focus on its three principal subsidiaries: Travel Related Services, IDS Financial Services and American Express Bank.
American Express will take a first-quarter charge of about $630 million because of the sale, including taxes, transaction-related costs and a reduction in goodwill of $750 million, the companies said in a statement. But the loss on the sale will be partly offset by the previously announced gain on the sale of the Boston Co. and the anticipated gain on the sale of shares in First Data Corp., American Express said.
Primerica said it plans to fund the cash portion of the transaction and strengthen Smith Barney's capital base by issuing $550 million in new debt securities and about $500 million in unspecified equities.
Primerica closed Friday at $49.50 a share in New York Stock Exchange trading, up $1.50 for the day and $11.375 for the week as investors applauded the transaction's money making potential for the acquirer. Amex rose 62.5 cents on the New York exchange to close at $28 a share.