Merrill Lynch is in negotiations to sell its 20 per cent stake in Bloomberg LP, the financial data and news company founded by New York mayor Michael R Bloomberg, as the firm seeks to raise still more capital, people involved in the talks said on Friday.
The discussions are in the early stages and the talks could fall apart, these people warned.
No agreement has been reached over the valuation of Merrill's stake, which Merrill acquired in the mid-1980s as one of Bloomberg's original customers. Under the terms of its shareholder agreement, Bloomberg has the right of first refusal to buy the stake, these people said.
A sale of Merrill's stake would give an official value to Bloomberg, which has jealously guarded information about its profitability, and to the wealth of the man who founded the company and who remains its principal owner.
Bloomberg is a fixture on listings of the wealthiest people in the world, but much of his wealth is tied to his 72 per cent stake in the company.
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Analysts have speculated that Bloomberg, which is privately held, could be worth $20 billion or more. News reports have estimated the company's annual operating profit at about $1.5 billion.
In a twist, Merrill may help Bloomberg finance a buyback of the stake, the people said. Merrill Lynch has been considering a sale of Bloomberg to help it shore up its balance sheet, which has been ravaged by its bad bets on mortgages.
Just last week, William Tanona, an analyst at Goldman Sachs, forecast that Merrill would take a $4.2 billion write-down when it announces its second-quarter results in mid-July.
But Merrill, which has already raised $15 billion since John A Thain took over as chief executive last fall, is finding it difficult to raise additional capital through previously used means such as selling preferred stock to sovereign wealth funds and other institutional investors, and it would prefer to avoid diluting the holdings of existing investors.
People involved in the talks said they hoped to complete a deal by the time of Merrill's earnings release.
News of the talks, which had been speculated about for several weeks, was first reported Friday in The New York Post.
Merrill has been closely linked to Bloomberg LP almost since its founding in 1981, after Bloomberg was fired from Salomon Brothers. The firm became Bloomberg's first customer in 1982, buying terminals that resembled typewriters hooked up to terminals.
Since then, however, Bloomberg has vastly expanded its services, ranging from mountains of data on stocks and bonds to one of Wall Street's most comprehensive who's who directories. The company has made its terminals indispensable to financial firms, outpacing older rivals like Reuters (now Thomson Reuters) and Dow Jones & Company (now owned by the News Corporation).
Its profits helped Bloomberg pay for his expensive campaign for New York's mayoralty in 2001, and his re-election effort as well.
Because Merrill has a limited universe of buyers for its stake, it will probably have to sell it at a discount to its true valuation, these people said. Other would-be buyers, like private equity firms, have been mostly sidelined by a dearth of cheap debt financing, and it is unclear if Bloomberg would waive its right to buy the stake to allow a private equity firm to buy it. Merrill's chief, Thain, valued the stake at $5 billion to $6 billion when he spoke at a conference last month. He hinted heavily in recent weeks that Merrill would consider selling its Bloomberg stake as well as its 49 per cent stake in BlackRock, the money manager. Its stake in BlackRock, which is publicly traded, is worth about $10 billion.
"It is true that there are some liquidity restrictions on BlackRock and Bloomberg, but I don't believe that that would prevent us, if we decided to, from using either of them as means of raising capital," Thain said last month, a reversal of his stance in January.
A spokesman for Merrill declined to comment, as did a spokeswoman for Bloomberg.