Merrill will sell stock worth up to $6.2 billion

Merrill Lynch & Co., hit by huge sub-prime mortgage losses, said Monday it would boost its capital by selling as much as $6.2 billion of common stock -- at a discount -- to a Singaporean state-owned fund and to a U.S. investment management firm.

Singapore’s Temasek Holdings agreed to buy $4.4 billion in Merrill stock with an option for $600 million more by March 28. Davis Selected Advisors agreed to buy $1.2 billion of stock.

The investors are paying $48 a share, 14% less than Merrill’s closing price Friday of $55.54 a share. Temasek agreed to hold its stake for at least a year, and Davis will also be a long-term investor, Merrill said. Temasek’s stake won’t exceed 10%, and neither the sovereign fund nor Davis Advisors will play a role in governing Merrill, the firm said.

Merrill’s talks with Temasek were widely reported last week, but the Davis investment was more of a surprise.

The Wall Street firm’s shares rose as much as 5% on the announcement but slid into negative territory after the discounted price was disclosed. The stock closed down $1.64, or 3%, at $53.90. It is off about 42% this year.

An $8.4-billion write-down of mortgage-related holdings led Merrill to post a $2.2-billion third-quarter loss and oust Stan O’Neal as chief executive in October. John Thain, former CEO of NYSE Euronext, operator of the New York Stock Exchange, succeeded O’Neal on Dec. 1.

Some analysts expect Merrill to post a fourth-quarter write-down at least as large as the third quarter’s, adding to the need for a capital injection.

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

There has been speculation that Merrill would consider selling its 20% stake in financial news and data provider Bloomberg. Some analysts have valued that investment at more than $5 billion.

In selling stock to Temasek, Merrill follows Citigroup Inc., Morgan Stanley and UBS in tapping the investment funds of governments in the Middle East and Asia to shore up capital.

“The only negative for these capital infusions is that they’re selling their stock at the lows,” said Ben Wallace, a money manager at Grimes & Co. in Westborough, Mass.

Davis Advisors is known as a value investor that turns over only about 5% of its portfolio each year.

“What we like so much about John Thain is that he has a proven track record of creating shareholder value,” said Kenneth Feinberg, who helps oversee more than $100 billion at Davis Advisors, including its Davis Financial Fund, which has declined 4.6%.

Thain, a former president of Goldman Sachs Group Inc., helped transform the NYSE into a publicly traded company in 2006. By the time his departure was announced last month, its shares had gained 35% since their first day of trading, twice as much as the Standard & Poor’s 500 index in the same period.

“Davis Funds are very credible,” said Ken Crawford, who helps oversee $900 million -- including Merrill shares -- at Argent Capital Management in St. Louis. “Their involvement signals that they believe the shares offer value and Thain is the right CEO going forward.”

Set up in 1974 to run state assets, Temasek manages a portfolio of more than $100 billion that includes controlling stakes in seven of Singapore’s 10 biggest publicly traded companies. It also holds 18% of London-based Standard Chartered and 28% of DBS Group Holdings Ltd., Southeast Asia’s largest bank.

Temasek says it has earned an 18% average annual return since its inception.