December 26, 2007 / 9:27 AM / 11 years ago

UPDATE 1-RESEARCH ALERT-Citi cuts Merrill Lynch price target

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Dec 26 (Reuters) - Citigroup cut its price target on Merrill Lynch & Co Inc MER.N to $80 from $85, citing equity dilution as a result of the company’s decision to raise more than $6 billion of equity from two investors and sell its financing business.

The brokerage, however, said it expects these sales to be accretive to return on equity.

The brokerage maintained its “buy” rating on the stock, saying the company is well positioned to continue to be able to drive growth from the benefits of significant investments over the past couple of years.

The sale of its finance business will free up an additional $1.3 billion, Citigroup analyst Prashant Bhatia wrote in a note to clients dated Dec. 24, adding it is just the beginning of management’s actions to sell noncore operations.

Merrill, hit by huge subprime mortgage losses, had said on Monday it would boost its capital by selling up to $6.2 billion worth of discounted stock to Singapore’s Temasek Holdings and Davis Selected Advisers.

The company lost $2.3 billion in the third quarter after recording an $8.4 billion write-down, mostly on subprime mortgage-related securities. Some analysts expect an even bigger write-down in the fourth quarter.

“Despite Merrill’s lower exposure to high-volatility businesses, the risk of poor performance in these businesses still exists,” Bhatia wrote. (Reporting by Avishek Mishra in Bangalore; Editing by Bernard Orr)

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