UPDATE 4-Quarterly loss marks tough tryout for Legg Mason's Sullivan

Fri Feb 1, 2013 9:17pm GMT

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* Fund manager reports continued equity, bond outflows

* Search for permanent CEO nearing completion-interim CEO

* Shares down 3.2 pct

By Ross Kerber and Jessica Toonkel

Feb 1 (Reuters) - Talk about a tough tryout.

Legg Mason Inc on Friday reported a sharp loss of $453.9 million amid charges and continued outflows of customer cash in the three months ended December 31.

It was also the first quarter during which interim Chief Executive Joseph Sullivan was in charge at the Baltimore fund firm as it struggles to regain its edge as one of the largest publicly-traded asset managers, with $648.9 billion under management at the end of December.

Executives have said Sullivan appears to have the inside track for the permanent CEO job. The company's fiscal third quarter results may foreshadow a difficult start if he does get the nod.

Yet, taken as a whole, the results may not hurt Sullivan's chances. His analyst call after results cited a host of strategic changes in the works, including revenue-sharing deals with affiliates that could allow for greater compensation. Tensions over those deals have been an obstacle to growth, some say. Observers say Sullivan's leadership in this area could boost his chances of getting the job.

"It's about the strategic vision and delivering on that," said Mac Sykes, an analyst at Gabelli & Company. He added that the changes in revenue sharing agreements could be "a positive signal for Sullivan" and noted investors are more interested in long-term changes than one quarter's results.

Board members and Sullivan would not grant interviews. On the conference call, Sullivan said the board's CEO search committee is near the end of the process and investors should expect a permanent CEO named "in-the-not-too-distant future."

Assets under management dipped about $1.8 billion during the quarter, as net client withdrawals of $7.5 billion were partly offset by market gains. During the quarter, equity outflows were $8.3 billion, and bond outflows were $6.8 billion, while clients added $7.6 billion to liquidity products like money funds.

Shares of Legg Mason closed down 3.1 percent at $26.79 as analysts expressed concerns about the outflows of customer cash.

"DISAPPOINTING" RESULTS

Legg Mason lost a net $453.9 million, or $3.45 per share, in its fiscal third quarter ended Dec. 31, compared with year-earlier net income of $28.1 million, or 20 cents per share.

As Legg Mason had forecast, the loss included pre-tax charges of $734 million, or $508 million after taxes, to account for writing down the value of assets like fund management contracts and uncertainties such as the CEO search.

Excluding a tax expense, the loss of $3.38 per share was deeper than the $3.23 that analysts had expected, according to Thomson Reuters I/B/E/S.

Sullivan called the results disappointing but said the company had made good progress on a number of strategic fronts, such as improving its fund performance and expanding into new products to lessen its dependence on areas like its big Western Asset Management bond division.

He cited the purchase of London fund-of-funds firm Fauchier Partners and a new deal on revenue sharing with Permal, a unit involved in hedge-fund investing. Sullivan said similar agreements with other investment units could follow.

Reworking compensation to provide more equity to employees should help recruiting and retention, Sullivan said on the call.

"It helps them to think longer term," he said. Legg Mason may also use the model for future acquisitions.

Legg Mason does not disclose details about its deals with the affiliates. It is unclear whether the affiliates would welcome the changes, Sykes said.

Legg has been built through a patchwork of deals, resulting in eight main independent asset management units, each with separate revenue-sharing agreements. A pending merger between its equity-focused ClearBridge Investments and Legg Mason Capital Management units will soon reduce the total to seven.

Some affiliates want help from the parent company with selling and marketing, sources have said.

SHARES UNDER PRESSURE

Sullivan, 55, took over in October on an interim basis after former CEO Mark Fetting stepped down, raising hopes of a shake-up.

Recent steps, such as the combining of units and Permal's new deal, show Legg Mason's board, which includes activist investor Nelson Peltz, was giving Sullivan room to try things his way, some industry experts say.

"The board would not have let him move ahead with those things unless they were convinced that he was a guy they were comfortable with," said fund industry consultant Burt Greenwald.

If Sullivan were permanently named CEO, however, it could indicate little change in strategy.

Investors and bankers have pushed bigger changes, like selling off units to improve Legg Mason's share price, which has not recovered since the financial crisis like some of its peers. Rivals BlackRock Inc and T. Rowe Price Group are above their levels in late 2007, while Legg Mason is valued at less than half those pre-recession levels.

"We wanted a big name that was going to bring change and fix this," said one large investor, speaking on condition of anonymity because he is not allowed to speak to the press. "It's hard to suspect a big strategy change with Sullivan as CEO."

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