Merrill Lynch is in negotiations to sell its 20 percent stake in Bloomberg L.P., the financial data company founded by New York Mayor Michael Bloomberg, as the securities firm seeks to raise still more capital, according to people involved in the talks.
The discussions remain in the early stages, and the talks could fall apart, these people warned.
No agreement has been reached yet over the valuation of Merrill's stake in Bloomberg, which it acquired in 1981 as its lead financier when the company was founded. Under the terms of its shareholder agreement, Bloomberg has the first right of refusal to buy the stake, these people said.
A sale of Merrill's stake would also give an official value to Bloomberg, which has jealously guarded information about its profitability. Analysts have speculated that Bloomberg, which is privately held, could be worth as much as $20 billion or more.
Media 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 announced its second-quarter results in mid-July.
But Merrill, which has already raised $15 billion since John 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.
Merrill has been closely linked to Bloomberg L.P. almost since its founding in 1981.
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 pricey terminals indispensable to financial firms, outpacing older rivals such as Reuters (now Thomson Reuters) and Dow Jones & Co. (now owned by News Corp.).
Because Merrill is limited in the 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, such as private equity firms, have been mostly sidelined by a dearth of cheap debt financing.
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 percent stake in BlackRock, the money manager. Its stake in BlackRock, which is publicly traded, is worth about $10 billon.
"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 at the conference, a reversal of his stance when he spoke about the subject in January.
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