Six years after Merrill Lynch set up shop in commercial finance for the US middle market, it has sold the business to GE Capital, releasing $1.3bn of capital for the subprime-battered investment bank.
The deal wraps up loose ends for GE: Merrill Lynch Capital was formed by refugees from Heller, the $5bn commercial finance business GE bought in 2001. Is it an equally neat ending to Merrill’s troubles? The sale, on top of (ultimately) a $6.2bn investment by Singapore’s Temasek and fund manager Davis Selected Advisors, leaves Merrill in better shape to cope with further writedowns of, potentially, as much as $10bn in the fourth quarter. That these boosts to capital have been secured since John Thain’s arrival as chief executive this month suggests decisive action is being taken.
But the notion that eager investors are fighting for a bite of Merrill should not be overdone. Temasek paid $48 a share for its stake, compared with Merrill’s share price of $54 on Wednesday, and $93 at the start of 2007. The terms of the Merrill Lynch Capital sale are undisclosed but financing giant GE Capital seems unlikely to have paid top dollar for a smallish overlapping business.
Though further non-core divestments could follow, repeated writedowns and an influx of capital have helped clean the slate for 2008. Still, Merrill looks vulnerable to an inevitable slowdown in the investment banking business. According to Dealogic, Merrill’s investment banking revenues rose 15 per cent in 2007, above average for the top 10 banks, creating a challenging base for comparisons. And the bank is still particularly strong in debt underwriting, where the pinch of a continuing credit squeeze would be felt keenly. Investment banks reinvent themselves constantly but those such as Merrill, Citigroup and UBS, which disgraced themselves this year, are bound to have a harder road back.
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