Temasek to buy US$5bn share of Merrill Lynch

Merrill Lynch became the latest Wall Street bank to grab a financial lifeline from a foreign government, agreeing on Monday to sell US$5 billion in new stock to Temasek Holdings, Singapore's sovereign investment company, and a smaller stake to a domestic firm, as the fallout from the mortgage mess continues to spread.

The move comes as analysts predict that Merrill, the nation's largest brokerage, will write down its mortgage investments by an additional US$8 billion or more in the fourth quarter. Such losses could force the firm to raise even more capital.

Merrill Lynch also agreed on Monday to sell most of its commercial finance business, Merrill Lynch Capital, to the General Electric Co in a deal that would raise about US$1.3 billion for other parts of its business.

"One of my first priorities at Merrill Lynch was to strengthen the firm's balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments and the sale of Merrill Lynch Capital," John Thain, Merrill's chairman and chief executive, said in a statement.

To raise US$5 billion, Merrill Lynch will sell new stock to Temasek at a discount to the recent market price. It will sell an additional US$1.2 billion in discounted shares to Davis Selected Advisers, a big money management firm based in Tucson, Arizona. Together, these two investors will gain a stake of less than 10 percent in Merrill. Neither will have a role in the management of the firm nor any presence on its board.

Merrill may have to strengthen its capital position further given the likelihood of widening losses on its mortgage investments.

"If, after fourth-quarter earnings, we find that we need to enhance it further, we will," said a person close to the situation.

While news of Monday's deals initially lifted its stock, the shares quickly wiped out their gain to close down 2.95 percent at US$58.90 in a holiday-shortened session. By selling new stock, Merrill will dilute the stakes of existing shareholders.

Temasek, which is controlled by Singapore's finance ministry and manages a portion of the city-state's foreign exchange reserves, has been stepping up its investments inside and outside Asia. In September it was invited by Barclays of Britain -- along with the China Development Bank -- to become shareholders, in exchange for a cash infusion that Barclays needed to improve its offer for the Dutch bank ABN Amro.

Other sovereign wealth funds have also swooped down on weakened Western financial companies. Singapore's lesser-known government fund, the Government of Singapore Investment Corp, recently agreed to invest US$9.7 billion in UBS. Citigroup is selling a US$7.5 billion stake to the Abu Dhabi Investment Authority. And last week, Morgan Stanley agreed to sell a US$5 billion stake to the China Investment Corp.

While they are based on opposite sides of the world, both Temasek and Davis have a record of buying beaten down stocks and holding them for long periods. Both also have significant investments in financial services firms. Temasek's holdings are largely in Asia. Davis has big stakes in blue-chip companies like American Express, AIG and JPMorgan Chase.