Merrill Sells Up To $6.2B Stake at Discount

Merrill Lynch (MER) announced Monday it would receive a cash infusion of up to $6.2 billion by selling new common stock to Temasek Holdings Ltd., an investment vehicle for the government of Singapore, and Davis Selected Advisors LP. Shares initially rose about 4%, but later fell into negative territory when it was disclosed the shares were being sold at a discount. Temasek will buy $4.4 billion worth of Merrill stock, with an option for $600 million more by the end of March. U.S. asset manager Davis Selected Advisers will buy another $1.2B. The firms will pay $48/share, a nearly 14% discount to Friday's close of $55.54. Shares were last down 2.8% to $54.

Merrill said the investors will not play a role in its governance. Analysts said that despite diluting existing shares, a cash infusion is a better choice than a weak balance sheet on the heels of mortgage-related losses. The infusion is likely a precursor to a large Q4 writedown that analysts say may outdo Merrill's Q3 writedown of $8.4 billion. Merrill had 855.4 million shares outstanding at the end of September; the current issue would bring that number to about 984 million, or about 15%. "It's very positive that Merrill Lynch is taking the steps that it needs to shore up its balance sheet," said Sean Egan of credit-rating firm Egan-Jones Ratings.

Singapore's investment is the latest in a growing number of sovereign wealth funds to take stakes in Wall Street firms. Morgan Stanley (MS) recently received $5 billion from China (Morgan Stanley Gets $5B Cash Infusion After Huge Q4 Loss); Citigroup (C) last month agreed to sell up to a 4.9% stake to Abu Dhabi for $7.5 billion (Citigroup Receives $7.5 Billion Capital Infusion from Abu Dhabi); and UBS (UBS) recently took on a $9.75 billion investment from a different Singapore sovereign fund (UBS Raises $11.5 Billion; Writes Down Another $10B).

Sources: Press release, Reuters, Wall Street Journal
Additional Reading: Sovereign Wealth Fund Datapoints of the Day • How Much Will Sovereign Wealth Funds Impact Stocks and Bonds?

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