Merrill Lynch said it plans to sell most of its Chicago-based capital lending business to General Electric's commercial finance arm and will boost its capital by raising up to $6.2 billion in a private placement with Singapore's Temasek Holdings and Davis Selected Advisors.
Merrill Lynch's new Chief Executive John Thain said the GE deal will allow the brokerage to redeploy about $1.3 billion of capital to other parts of the company.
The GE acquisition, expected to close in the first quarter of 2008, will add more than $10 billion in assets and $5 billion in commitments to GE Capital Commercial Finance's base of $260 billion.
GE Capital will buy Merrill Lynch Capital's corporate finance, equipment finance, franchise, energy and healthcare finance units. Merrill Lynch Capital's commercial real estate finance unit is not part of the transaction.
Merrill Lynch launched the middle-market finance unit in 2002 after GE bought Heller Financial for $5.3 billion a year earlier. Merrill Lynch hired former Heller executives such as Robert Radway to run the business.
GE is the parent company of CNBC.
The investment from Temasek Holdings and Davis Selected Advisors will help shore up Merrill's balance sheet, as the world's largest brokerage faces steep losses amid the global credit turmoil.
Deteriorating mortgage-related investments and corporate loans caused the biggest loss in Merrill's 93-year history during the third quarter, as it suffered $8.4 billion of writedowns.
Temasek, a government-sponsored investment fund, pledged up to $5 billion and New York-based Davis Advisors will buy $1.2 billion of Merrill stock. The deal is the latest in which an ailing U.S. investment bank has turned overseas for additional capital.
John Thain, who took over as Merrill's chief executive on Dec. 1, pledged to solidify the company's financial position when he came on board. As part of that program, he also announced Monday the sale of Merrill's commercial finance business to General Electric's finance arm for an undisclosed price.
"One of my first priorities at Merrill Lynch was to strengthen the firm's balance sheet, and we have made great progress toward that by bolstering our capital position through these investments and our announced sale of Merrill Lynch Capital," he said in a statement.
Temasek will acquire $4.4 billion in Merrill Lynch common stock, and has the option to purchase an additional $600 million by March 28. The investment is for no more than 10 percent of the common stock, and Temasek will not have a seat on Merrill's board.
Temasek has a track record of making large investments in financial institutions, and has major holdings in Britain's Standard Chartered and South Korea's Hana Financial Group. The fund was set up in 1974 to manage Singapore's assets, and now controls a portfolio of over $100 billion worth of investments.
Davis Advisors is a closely held company that was founded by former Bank of New York executive Shelby M.C. Davis. The investment was described by Merrill Lynch as being "long term." The investment could not come at a better time for Merrill Lynch, which some analysts believe might have another $10 billion of writedowns coming in the fourth quarter from its battered mortgage-backed securities portfolio. Global banks have written down an estimated $105 billion this year alone from exposure to subprime loans and other debt commitments.
That has caused a number of financial companies to secure deals involving infusions from state-owned sovereign funds -- mostly from Asia and the Middle East -- in recent months. Government-sponsored investment vehicles have invested about $25 billion in Wall Street since the mortgage crisis began this summer.
Morgan Stanley last Wednesday announced a $5 billion investment from China's government-controlled investment vehicle to help replenish its capital.
In October, Bear Stearns agreed to a $1 billion investment from China's government-controlled Citic Securities. Citigroup received a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government last month.
UBS last week announced that the Government of Singapore Investment Corp., the city-state's other state investment fund, is investing $9.75 billion for a 9 percent stake in the Swiss banking company.