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Temasek gets Merrill stake at a discount

New York, Dec. 25 (Reuters): Merrill Lynch shored up its capital base by as much as $7.5 billion after selling a stake to Singapore government’s Temasek and an asset manager and unloading much of a lending business, as it wrestles with huge sub-prime mortgage losses.

Merrill said on Monday it would sell up to $6.2 billion in shares to Temasek and asset manager Davis Selected Advisers. Both investors bought their stakes at $48 a share, or more than 13 per cent below where the stock closed on Friday. News of the discount pushed Merrill shares 3 per cent lower on Monday.

The announcement of these deals is a likely prelude to another large write-down for Merrill Lynch in the fourth quarter. Some analysts estimate the hit will be bigger than the $8.4 billion write-down Merrill recorded in the third quarter.

Fox-Pitt Kelton analyst David Trone estimated the deal’s dilution to existing shareholders would be about 13 per cent from the total potential investment. Trone and other analysts estimate Merrill’s potential losses on mortgage-related securities could exceed $16 billion in 2007.

“Coming into this debacle the company had several billion in excess equity capital,” Trone said in a research note. “On balance, this continues to signal that problems are significant, but management is taking steps to get beyond it.”

Temasek will buy $4.4 billion worth of Merrill stock with an option for $600 million more by March 28. Merrill gave Temasek a discount partly in exchange for a lock-up agreement that keeps the investor from selling shares for a year.

Davis Selected Advisers, a $100-billion US-based asset manager that also runs mutual funds, will buy $1.2 billion worth of Merrill shares as a long-term investment. Davis is known as a value investor with an annual portfolio turnover of about 5 per cent.

About 35 per cent of Davis’s holdings are in financial services companies. Ken Charles Feinberg, a co-portfolio manager at Davis, said his company contacted Merrill about two weeks ago, inquiring if they would be interested in an outside investor.

Earlier on Monday, Merrill said it would sell most of its middle-market lending business to General Electric’s commercial finance arm to free up $1.3 billion in capital.

Merrill’s shares fell $1.64 to close at $53.90 in a shortened session the day before Christmas, when the market is closed. Merrill shares are down 42 per cent this year, compared with a 13 per cent decline for the sector as measured by the Amex Securities Broker Dealer Index, .XBD.

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