Merrill Lynch Looks To Sell Mid-Market Lending Arm

General Electric Co. and Cerberus Capital Management top a list of suitors lining up to buy the middle-market senior lending arm of Merrill Lynch & Co. by year-end, several sources familiar with the process told Buyouts (a sister magazine to peHUB).

The beleaguered New York investment bank began shopping Merrill Lynch Capital over the summer and recently winnowed the field of potential buyers down to four bidders. Also in the running are a U.S.-based LBO firm and a European investment bank, according to our sources. Merrill Lynch isn’t expected to complete the deal until the bank’s board of directors has installed a new CEO to replace departed chief Stanley O’Neal.

It’s unclear what prompted Merrill Lynch to sell its five-year-old commercial finance unit, which both underwrites senior loans and holds them on its books. The group is run out of Chicago by Daniel Marszalek, a managing director and former Heller Financial president who was recruited to launch Merrill Lynch’s operation in 2002 as a competitor to GE. A Merrill Lynch spokesperson declined to comment, citing a policy of not responding to market rumors.

Should it win the auction, GE would be expected to combine the Merrill Lynch group with Chicago-based GE Antares Capital, which claims to be the number one provider of senior loans of $225 million or less. GE has used two recent acquisitions to become a major player in the senior loan market. In 2001, it spent $5.3 billion to buy Chicago-based Heller Financial and followed up in 2005 with the purchase of Antares, also based in Chicago, for an undisclosed sum. A GE victory would do much to reverse the diaspora of Heller Financial pros who now fill the upper ranks of Antares and Merrill Lynch Corporate Finance. GE did not immediately respond to a request for comment.

For its part, New York-based Cerberus Capital Management is probably eager to attach the business to its burgeoning financial-services arm centered around GMAC Corp., several sources told Buyouts. Cerberus Capital also operates a mid-market debt arranger, Dymas Capital, and a mid-market lender, Ableco Finance. Cerberus Capital could not be reached for comment.

Merrill Lynch Capital, which employs 147 people, completed 148 transactions valued at more than $5.2 billion in 2005, according to an overview posted to the division’s Web site. The company has not made 2006 full-year data available.