Umm, I thought we were supposed to believe that Merrill Lynch’s (MER) selling a part of its Bloomberg stake and by taking $40 billion of writedowns this year alone, investors were (almost?) out of the woods.

Guess again, news came overnight that Merrill will be selling more than $8 billion in new stock (read, diluting existing shareholders) at preferential terms to the Singaporean buyers of the last slug of stuck Merrill stuffed everyone with.

So, as Roger Ehrenberg asks, “…after all this, Is there more to come?”

Let’s get this straight:

CDO book:
Bloomberg reports that Merrill is selling its $30+ billion bond portfolio for 1/5 of face value.  I guess that’s better than 0.

New stock offering:
A lesson in dollar-cost averaging for Singapore’s Termasek.  Merrill is paying Temasek $2.5 billion to offset losses in Temasek’s previous investment in Merrill and to encourage the fund into putting $3.4 billion more into MER stock.

Bloomberg:
According to CEO Thain, Merrill is selling “a controlling stake [in Bloomberg], so we’ll sell more than 51%, but the exact percentage hasn’t been totally determined yet.”

What does that mean?  How much more than 51%?  Isn’t selling off that asset better than massively diluting shareholders after a year that has seen MER stock drop over 61%  Isn’t Bloomberg not even close to being core to what Merrill does anyway?

BlackRock:
Also, why are we holding on to this non-core asset?  Again, according to Thain, “BlackRock as we’ve always talked about is strategic to us. We in fact with the discussions with BlackRock have broadened and lengthened our distribution agreement with them and we continue to believe that that is a very good and important partnership for us and is working well with us.”  I guess what Merrill is saying is that it certainly helps to have a financial relationship with a buy-side firm to help with deal placement and uptake.  Not particulary inspiring and again, they’re smooshing the small investors.

The Bloomberg piece quoted above ends with a great quotation:

“Why these assets are written down when you’re selling them and weren’t written down in your earnings is a question,” said Ralph Cole, a senior vice president in research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which oversees $2.7 billion and doesn’t own Merrill shares. “This kind of announcement is surprising and a little disheartening.”

I may sound angry, but come on, guys.  I don’t even own the stock but this is the fourth share sale this year and all along, management has said that it has sufficient capital.  Not a great way to treat existing shareholders and certainly not enough to engender enough trust to lure new investors off the sidelines.

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By Zack Miller
IsraelNewsletter.com

Bloomberg ran an article over the weekend saying that Bank HaPoalim was in due-diligence discussions over an undisclosed Russian bank.

Somehow, although we don’t yet know the name of the bank, we do know the size of the transaction. Bloomberg pegs Ma’ariv’s estimate of the transaction size at $150 million for a 74 percent stake in the firm, representing 3.5x on assets.

“Some of the payment will be used to increase the bank’s capital and to open more retail branches, Ma’ariv said. Hapoalim believes the Russian bank will be able to earn a 12 percent to 13 percent return on equity, it said.”

This follows in-line with our thesis that Israeli banks, utilities, and cellular firms need to look towards international expansion to continue growth. I wrote a while back that Israeli firms can continue to squeeze more out of their customers (banks by offering more services and cellular firms by introducing data to boost ARPU) but Israel is a mature market. Mature markets are defined by penetration of services.

My partner and esteemed perma-bull, Aaron Katsman, has written about the spillover effects from the subprime/real estate issues in the US and how they might affect Israeli banks.

Bank Hapoalim wants to use this investment to increase its retail presence. Russia looks prime for expansion.

Disclosure: Author’s fund has no position in any stock mentioned as of 11/09/2007.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter.  Stay ahead of the game and make smart decisions in Israel stocks.  Go here to learn more.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@israelnewsletter.com

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Zack Miller
IsraelNewsletter.com

As my colleague, Aaron Katsman, opined on these pages just a few months ago, Israel would not be immune to the subprime mess that began in the U.S., and through complicated collateralization, spread throughout the world. At the time, news spread quickly in Israel that a leading developer, Heftziba, was becoming insolvent and that its onerous debt of $400M (large in relative terms) quickly sacked any chance of paying back investors, banks that financed the company, and lastly, homeowners who purchased properties through Heftziba.

Well, Aaron’s prediction was spot on. Haaretz reported today that one of Israel’s largest banks, Bank Hapoalim, is suffering from the US mortgage malaise as well. Says Haaretz:

Hapoalim has a bond portfolio with American mortgage-backed securities valued at about $3.5 billion. So far the crisis has cost the bank $120 million. For the second quarter, Hapoalim had reported only a $35 million loss, but in an immediate announcement to the stock market yesterday evening in response to a demand from the Israel Securities Authority (ISA), the bank said that figure was now much higher.

Hapoalim claims that these bonds are only AAA government-type bonds but hasn’t been fully forthright about what they have on the books.  Bank Discount, another large Israeli bank, apparently has some significant exposure.

Look for more banks to follow-suit as over the past few years, many of the Israeli banks and financial institutions were buying large swaths of assets overseas, including in real estate-related exposure.

Investors in the US see how painful having invested alongside poor risk managers, let’s hope (and pray!) that Israeli risk managers have acted more prudently.

Disclosure: Author’s fund has no position in any stock mentioned as of 11/09/2007.

Please see our Disclaimer HERE.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com

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