Merrill has strong growth potential, says Singapore Temasek
Win-win deal as firm recoups and Temasek gains toehold in US franchise: Analysts
By Gabriel Chen
TEMASEK Holdings says its newly unveiled US$4.4 billion (S$6.4 billion) investment in United States financial giant Merrill Lynch reflects its belief in the ’strong growth potential’ of the troubled firm.
Temasek’s senior managing director of investments for India and Russia, Mr Manish Kejriwal, said in a statement that Merrill is a leading global financial institution with strong franchises in wealth management, global markets and investment banking.
‘We believe it has an excellent platform with strong growth potential under John’s leadership,’ Mr Kejriwal said. In the wake of billions of dollars in US sub-prime mortgage crisis-related losses, Merrill has appointed Mr John Thain as its chief executive.
Merrill will sell US$5 billion of new stock to the Singapore investment company and US money manager Davis Selected Advisors at US$48 a share - a 13.6 per cent discount to its trading price last Friday.
Temasek has an option to buy another US$600 million worth of shares by March 28 next year, as long as its ownership does not exceed 10 per cent of Merrill’s total outstanding common shares.
Analysts see Temasek’s investment as a win-win - allowing Merrill, long known for its ‘thundering herd’ of stockbrokers, to recapitalise while giving Temasek a toehold in a famous franchise hit by sub-prime-related losses.
PASSIVE INVESTORS
Merrill has described Temasek and Davis as passive investors, with neither entity having any rights of control in the firm.
‘Merrill shares have come down about 25 per cent to 30 per cent from their peak, so it’s actually an opportune action on Temasek’s part,’ Kim Eng analyst Pauline Lee said.
Merrill gave a discount partly in exchange for a lock-up agreement that keeps Temasek from selling the shares for a year.
Merrill, which is expected by analysts to announce further mortgage write-downs of US$8 billion or more, has described Temasek and Davis as passive investors, with neither entity having any rights of control in the loss- making brokerage.
‘Timing-wise, it’s perfect. I don’t think Temasek would have got any lower price than they what they are getting,’ said Credit Suisse chief economist and strategist for Asia-Pacific Arjuna Mahendran, who believes ‘asset infusion’ by sovereign wealth funds will save the US banking industry from worse results.
Sovereign wealth funds such as the Government of Singapore Investment Corp (GIC), Abu Dhabi Investment Authority and China Investment Corp have swooped to grab stakes in UBS, Citigroup and Morgan Stanley respectively.
The funds are helping to shore up the balance sheets of banks bleeding from sub-prime losses, but they have also come under scrutiny from opponents of the rush of foreign investment into Wall Street’s biggest names.
‘Americans’ perception of Singapore will be heightened,’ said DMG & Partners Securities senior dealing director Gabriel Yap. ‘It could be quite startling, especially for those who don’t know how rich Singapore is, particularly Americans living in the inner areas like Kansas or Louisiana.’
For now, the US is not opposed to cash-rich sovereign wealth funds taking stakes in its banks. ‘I’m fine with capital coming in from overseas to help bolster financial institutions,’ US President George W. Bush told a press conference last week.
With GIC and Temasek’s recent purchases into UBS and Merrill, industry watchers feel that it is Singapore that will benefit in the long run, as it aims to be the region’s wealth management hub, ahead of rival Hong Kong.
‘As in the case of UBS, Merrill would certainly think in favour of Singapore should it ever have to decide where to locate a business - be it private banking or investment banking,’ said senior banker Rolf Gerber.
Source : Straits Times - 27 Dec 2007
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