Return to search

Whitney: New Merrill Cap Raise Would Be Dilutive

Merrill Lynch & Co (MER.N: Quote, Profile, Research) may need to raise more capital, a move that would heavily dilute shareholders, said prominent Wall Street analyst, Meredith Whitney.

Wall Street investment banks are likely to disclose their Tier 1 capital ratios — a measure of a bank's strength — for the first time when they report second-quarter earnings, prompting some to raise additional capital, the Oppenheimer & Co analyst said. Whitney said a $1 billion equity capital raise by Merrill below its current market price would dilute existing shareholders by 80 percent more than a straight common offering.

A $3 billion equity raise at $38 per share would be 13.5 percent dilutive and a $5 billion raise at the same price would be 17.3 percent dilutive, Whitney said in the note.

Merrill would be required to issue additional shares to Singapore private equity firm Temasek if it were to make an offering below its original investment price of $48 a share.

In December, Merrill sold $6.2 billion in shares to Temasek [TEM.UL] at $48 a share to shore up its capital base after incurring large write-downs from exposure to subprime mortgages and other risky debt. Merrill gave Temasek a discount partly in exchange for a lock-up agreement that would bar the investor from selling shares for a year.

Shares of Merrill were down more than 2 percent at $36.96 in early morning trade on the New York Stock Exchange. They have lost about 30 percent of their value since the beginning of the year.

Also, J.P. Morgan Securities on Wednesday forecast a loss for Merrill in 2008 and slashed its second-quarter outlook, citing hedging losses and writedowns from monoline exposures. (Reporting by Dinesh Nair in Bangalore; Editing by Amitha Rajan)