The world's largest brokerage, struggling to right itself as the credit crisis continues, said it will issue more than 200 million new common shares as part of the deal. Singapore sovereign wealth fund Temasek Holdings agreed to boost its stake by acquiring another $3.4 billion stake, while Merrill's management plans to buy 750,000 shares.
Though capital-raising efforts are generally applauded, this move may well cause frustration among shareholders because it dilutes the company's stock. Chief Executive John Thain, who joined Merrill Lynch last year, had vowed in the past he wanted to avoid using a public offering to raise money.
Merrill made the announcement after the close of trading on Wall Street. Its shares closed down 11.6 percent to $24.33, and is down 54 percent this year. The stock drifted down 2 percent in after-hours trading.
The brokerage said it will sell a large portion of asset-backed securities and terminate hedges linked to bond insurers; those are two of its most troubled areas since the credit turmoil began last year. Merrill reported earlier this month its fourth straight quarterly loss and write-downs from failed investments approaching $40 billion.
The sale of asset-backed securities will cut its exposure by $11.1 billion from its level on June 27, leaving $8.8 billion of these securities on its books. Merrill will take a $5.7 billion pre-tax write-down during the third quarter.
The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts," said John A. Thain, Chairman and CEO of Merrill Lynch.
"Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizable sale on an accelerated basis, we have decided to further enhance our capital position by issuing common stock," Thain said in a statement. "The actions we announced both today and on July 17 will materially enhance the company's capital position and financial flexibility going forward."
Earlier this month, Merrill sold its stake in Bloomberg LP for $4.43 billion as a way to raise capital while avoiding diluting current investors' holdings by selling new securities.
The brokerage said it is also paying Temasek $2.5 billion to reset some provisions on a previous stake sale. Holders of Merrill's mandatory preferred stock agreed to move $5.4 billion into the share offering, and will be paid an additional $2.4 billion from dividends as a result of the exchange.
Merrill said it sold $30.6 billion of CDOs to an affiliate of Dallas-based investment firm Lone Star Funds, which will result in a $4.4 billion pre-tax write-down. The brokerage will provide financing for a majority of the purchase price.
Lone Star is owned by John Grayken, whose firm is known for investing in distressed debt. He could not immediately be reached for comment.
