Tuesday, 25 December 2007

Merrills Turn For Cash Injection

In what is fast becoming a trend for Wall Street firms, Merrill Lynch went hat in hand to Asia to get some sorely needed cash. From marketwatch.com:

Merrill raising up to $6.2 billion via equity placement

Merrill Lynch & Co. will raise up to $6.2 billion to be invested by Singapore-based investment firm Temasek Holdings Pte. Ltd. and U.S.-based Davis Selected Advisers L.P., the investment bank said Monday.

Along with the private placement of common stock, Merrill (MER) said it's selling its middle-market commercial finance business for an undisclosed amount.

Temasek will invest $4.4 billion in Merrill common stock, with the option to buy an additional $600 million in stock by March 2008. Its ownership position in Merrill won't exceed 10%, Merrill said.

Davis, meanwhile, will make a "long-term investment" of $1.2 billion, Merrill said. Neither Temasek nor Davis will have any "role in the governance" of Merrill, the firm

Meanwhile, Fitch Ratings maintained a negative outlook on Merrill following news of the investment, saying in a statement that it believes "there is a high probability that additional losses will be recognized in fourth-quarter 2007 fiscal year which collectively may result in [the firm] posting a loss for its 2007 fiscal year."

Fitch had lowered Merrill's long-term issuer default rating in October. Following an initial rise early in Monday's abbreviated trading session, Merrill shares closed nearly 3% lower, ending at $53.90.

Also Monday, Merrill said it is selling Merrill Lynch Capital, the firm's middle-market commercial finance business, to GE Capital (GE). Financial terms were not disclosed.

MER is widely tipped to record a similar writedown to the -$8.4 billion taken in the third quarter which led to a -$2.2 billion loss. The sale of Merrill Lynch Capital is estimated to free up $1.3 billion in capital. Will that be enough to offset the potential losses for the 4Q07? You would have to think it comes close so or else Temasek's shareholding could wind up being more than 10%. The only way to avoid that is to raise more capital or do more asset sales.

Preventing Temasek from owning more than 10% is probably also the reason why they must wait until the end of March to exercise their right to purchase another $600 million worth of MER common stock.

At the end of the day this move raises much needed equity capital for MER, however it is heavily dilutionary for current shareholders. Current estimates for MER earnings per share for 2008 stand at $7.13. That's only 6% lower than their record earnings of 2006. Analysts are still behind the eight ball with their earnings forecasts for Wall Street firms, expect significant revisions to MER's 2008 earnings going forward.