June 13, 2008 / 10:09 AM / 11 years ago

UPDATE 2-Merrill may need more capital, post Q2 loss - Lehman

(Adds analyst comments, background and updates share price)

By Tenzin Pema

BANGALORE, June 13 (Reuters) - Merrill Lynch & Co MER.N appears increasingly likely to raise additional capital, said an analyst at Lehman Brothers Inc, who also expects the world’s largest brokerage to post its fourth straight quarterly loss.

“More important, management appears open to the idea of selling stakes in Bloomberg and/or BlackRock, having previously resisted the idea,” analyst Roger Freeman wrote in a research note.

Earlier this week, Merrill Chief Executive John Thain said on a conference call that the brokerage would consider selling its stakes in news and financial data company Bloomberg and money manager BlackRock Inc (BLK.N) if it needed more capital.

Thain also said Merrill is “well capitalized,” but added that the company had last year considered selling its stakes in BlackRock, worth roughly $13 billion, and Bloomberg, worth about $5 billion to $6 billion.

“Given the extent to which Merrill shares have fallen since the prior two capital raises, issuing equity has become a very expensive proposition,” Freeman wrote. “Consequently, asset sales may be more palatable.”

Merrill in December and January raised more than $12 billion from outside investors, including sovereign funds like Singapore’s Temasek Holdings [TEM.UL] and the Kuwait Investment Authority.

These capital raises came as Merrill, which is one of Wall Street’s largest investment banks, recorded more than $30 billion in writedowns since its third quarter. Merrill’s shares have fallen by about a third this year.


Merrill is expected to post additional writedowns in net collateralized debt obligation (CDO) and subprime exposures, partially offset by gains in “Alt-A” and commercial mortgage-backed securities, analyst Freeman said.

The company also faces the risk of underperforming its peers in the near term as earnings estimates for the second quarter come down, he added.

“We expect Merrill to report a modest loss, due mainly to incremental reductions in carrying values related to monoline hedges on asset-backed securities CDOs that we expect the firm to have to take,” he said.

The analyst slashed his second-quarter outlook for Merrill to a loss of 64 cents a share, from his prior view of a profit of 27 cents a share.

Freeman also forecast a 2008 loss of 53 cents a share. His prior estimate was for a profit of 40 cents a share.

Analysts have a wide range of estimates for Merrill’s second quarter, with one projecting a loss of $1.50 per share, according to data compiled by Thomson Reuters.

Freeman cut his price target on the stock to $47 from $49. He rates Merrill “equal-weight.”

Shares of Merrill were up about 5 percent at $37.93 in late morning trade on the New York Stock Exchange. Through Thursday, they have plunged 32 percent this year, compared with a 25 percent drop in the Amex Securities Broker-Dealer Index .XBD. (Editing by Vinu Pilakkott, Himani Sarkar)

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