NEW YORK (Reuters) – Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research) may not want to sell its $10 billion (5 billion pound) stake in top performing money manager BlackRock Inc (BLK.N: Quote, Profile, Research). But it may have no alternative.
The No. 3 Wall Street investment bank's other options to raise capital as it faces billions of dollars in write-downs are looking tougher to achieve.
That's because the market's appetite for new shares in financials is dwindling — and because the terms of Merrill's recent capital raises make future sales particularly tough.
In addition, the chances look remote for a quick sale of its other major investment, a 20 percent stake in news and financial data company Bloomberg LP, analysts and bankers said.
BlackRock is publicly listed, which means Merrill Lynch's 49.8 percent stake could be sold to public investors or others quickly. Bloomberg, in contrast, is private and closely held, which would slow any sale.
“BlackRock is the only really viable asset to sell,” said James Palmisciano, chief investment officer at the Gracie Credit Opportunities Fund, which is considering investing in Merrill Lynch bonds.
Merrill Chief Executive John Thain hinted that he would rather sell the Bloomberg stake on a call with investors last month, when he said that BlackRock is a strategically important asset. “Bloomberg is just a very good investment,” he said.
But CNBC reported late last week that Bloomberg had offered to buy Merrill's 20 percent stake, which Thain said was worth $5 billion to $6 billion, for somewhere closer to $3 billion.
Finding other buyers for the stake could be difficult, bankers said. Bloomberg must approve the sale of the stake to any other party.
There is no shortage of media companies that would like to get a piece of what many industry observers say is a highly profitable business, but even some of the biggest conglomerates would have trouble shelling out $5 billion for a minority stake.
Some private equity investors could afford it, but there's little chance that they would want a passive stake.
“It's a minority stake and of no use to anyone else — it is designed not to give any control or rights,” said Dan Alpert, a banker at Westwood Capital.
It is also not immediately clear why Bloomberg would want to buy back the stake, and company executives and a spokeswoman declined to comment.
Bloomberg previously bought back 10 percent of itself that was in Merrill's hands, and used it as an incentive to reward top performers at the company, according to two people with knowledge of its inner workings.
It is possible that this could happen again, one of them said, or that Bloomberg simply could retire the stake and reissue it if it ever sold stock to the public.
As Thain mentioned, BlackRock is a strategic asset for Merrill Lynch. Merrill, which sold its asset management business to BlackRock in 2006 in exchange for the stake, distributes many BlackRock funds through its retail brokerage, the world's largest by number of brokers.
“As shareholders, we'd rather see them sell Bloomberg,” said John Augustine, chief investment strategist at Fifth Third Private Bank in Cincinnati.
But even if Merrill does sell the BlackRock stake, it would intend to maintain its relationship with the asset manager, a person close to Merrill said.
And Merrill is widely expected to need more capital. The investment bank has significant exposure to the repackaged mortgage securities known as collateralized debt obligations.
The chief financial officer of Citigroup (C.N: Quote, Profile, Research), a bank which like Merrill has already taken billions of dollars in write-downs on CDOs, said last month that he expects to record substantially more.
And Merrill also transferred some of its credit exposure to bond insurers, the largest of which lost their top credit ratings last month, which should result in further write-downs.
Add it all up, and some analysts expect more than $5 billion of write-downs for Merrill.
Raising money by selling common equity at current share levels would be prohibitively expensive, because investors who gave money to Merrill in December and January must receive substantial extra compensation if Merrill raises the money at too low a price.
That makes asset sales the best possibility, and because BlackRock would be easiest to sell, it will likely be Merrill's first choice, analysts said.
The fact that Merrill Lynch has at least $15 billion of valuable assets to sell gives it an advantage over other investment banks, said Fifth Third's Augustine.
“They have to figure out what to sell, but at least they have that option,” he said.
By Dan Wilchins