Temasek could profit on Merrill takeover: economists

[Char_Azn]

With all the talk about Temasek losing all our money, I'm surprised no one bothered to post this. Guess its not a stupid move after all

SINGAPORE (AFP) — Singapore's Temasek Holdings could walk away with a profit from its stake in investment bank Merrill Lynch despite the Wall Street firm's battering by a housing crisis, economists said Tuesday.

"It still might work out well from their perspective," said David Cohen, of global research house Action Economics.

Bank of America announced Monday it was paying 50 billion US dollars in stock for Merrill Lynch, whose biggest shareholder is Singapore's state-linked Temasek.

If Temasek decides to sell its stake, it could gain 1.5 billion dollars, according to an estimate by Ilian Mihov, an economics professor at graduate business school INSEAD in Singapore.

Since December, Temasek has invested billions of dollars in Merrill, whose shares tumbled about 78 percent over the past year on fears of widening losses from a meltdown in the subprime, or higher-risk, mortgage sector and a global credit squeeze.

Temasek's initial investment, covering 4.9 billion US dollars, came with a requirement that if Merrill raised more capital within 12 months at a price lower than the 48 dollars per share Temasek initially paid, it would be compensated for the difference.

That proviso kicked in for a subsequent Temasek investment into Merrill in July. The fund put that 2.5 billion dollars compensation back into the bank along with another 900 million US dollars.

Dow Jones Newswires reported that the protection measures effectively halved the purchase price to around 24 dollars per share.

Bank of America's deal offers Merrill around 29 dollars a share, compared with Friday's closing price of 17.05 dollars.

If Temasek sells to Bank of America, the Singaporean firm "could walk away with a profit, at least from the July commitment," Cohen said.

Mihov estimated the potential return for Temasek at about 20 percent. "So that's a very good return in these turbulent times," he said, adding it is not certain that Temasek will cash in its Merrill shares. Instead, they could be exchanged for Bank of America shares if Temasek sees long-term value in the bank.

"There are arguments on both sides," Mihov said.

Dow Jones Newswires, citing unnamed sources, reported Monday that Temasek was holding a meeting to discuss what to do.

"The investment team is meeting now. Their decision on how to handle the Bank of America shares will depend on how they view the long-term prospects of the bank," a source said. "Temasek always looks at the long term."

A Temasek spokesman told AFP it is too early to comment on the Bank of America deal.

The Singaporean firm holds 13 to 14 percent of Merrill.

Temasek reported a record profit of 18.2 billion Singapore dollars (12.7 billion US) in the year to March. It has controlling stakes in major regional firms and is one of two Singapore government investment vehicles, along with the Government of Singapore Investment Corporation (GIC).

GIC has invested billions into Swiss bank UBS and US banking giant Citigroup, both of which are victims of the supbrime crisis.

http://afp.google.com/article/ALeqM5i2utZN9Et0f-U1kZR8zBMw51evaA

 

[tiulehloumoh]

Most of the moron here like to read and spread "good" stuff only..... :p

 

[chinkangkor]

Look like the gamble paid off quite handsomely.

 

[Porfirio Rubirosa]

"...So the jury is still out on Temasek's investment in Merrill. If anything, the events of the past week have demonstrated again the risks of buying too early in a prolonged market downturn. The fall of Lehman Brothers and Merrill Lynch is also a reminder that in such an environment, even buying prestigious brand names provides no guarantees."
BT Editorial 17/9

 

[The_Latest_H]

With all the talk about Temasek losing all our money, I'm surprised no one bothered to post this. Guess its not a stupid move after all

They had to feel lucky because BOA bought it over. If Merill Lynch were allowed to die, Temasek would be dead on the spot.

When it comes to luck, they should be wiping the sweat of their foreheads and thank the Gods for it. After all, they didn't buy it in order to see another bank buy over; they wanted to manage it or use their directors or their leverage to ensure that they can turn the business around.

But after almost a year, it has only gotten worse. Its only luck- and for that they should be thankful and not be cocky.

 

[NgEjay]

They had to feel lucky because BOA bought it over. If Merill Lynch were allowed to die, Temasek would be dead on the spot.

Spot on, Latest H.

Temasek has badly miscalculated the subprime mess and they haven't lost money YET because of pure luck.

The methodology is deeply flawed and Temasek has shown to be extremely trigger happy, and also very willing to active trade the financial instruments that it CLAIMS it is having a LONG-TERM VIEW of.

The up-shot of all this tells us Temasek is just a bunch of boys with toys.

 

[Porfirio Rubirosa]

17 September 2008
Occluded by the Merrill Lynch headlines, an Indonesian riddle

The joke going round was that the atrial flutter that Lee Kuan Yew suffered over the weekend was caused by news of Merrill Lynch's near meltdown. An atrial flutter is a cardiac condition when the upper chamber of the heart fails to beat properly.

Singapore's sovereign wealth fund Temasek Holdings had invested US$5.9 billion in Merrill Lynch since last December. Temasek is headed by Ho Ching, Lee's daughter-in-law.

In late April this year, Lee had stoutly defended both Temasek's decision to invest in Merrill Lynch and the Government Investment Corp's decision to invest in troubled UBS bank. "The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again," Lee said in a Bloomberg Television interview. [1]

As recently as end August 2008, the "franchise" word was still being used.

After getting US regulatory approval to raise its stake in Merrill Lynch from 9.4 to about 14 percent, Temasek's international senior managing director Michael Dee reaffirmed their confidence in the investment bank. Merrill Lynch had a "great franchise, which has existed through many crises through a long period of time," he said. [2]

Two weeks later, it was one crisis too many, and that "great franchise" may be no more, except at best as a division of Bank of America.

With the collapse of Lehman Brothers, Merrill Lynch suddenly looked almost as shaky. It had reported some US$52 billion in write-downs but people still weren't sure how much more troubled assets remained.

Merrill CEO John Thain ran quickly to Bank of America, which agreed over the weekend to buy Merrill Lynch for a total of US$50 billion in an all-stock deal. The price represents US$29 per share, about 70 percent higher than its Friday closing of US$17.05, a premium some people find hard to understand. [3]



At least, at this price, Temasek does not face a loss, having paid "an average price of US$23.11 a share based on Bloomberg calculations from exchange filings." [4] But see update in box on right.

Temasek first poured capital into Merrill in December 2007, injecting some US$5 billion between December and February at US$48 a share. In mid 2008, after reporting more write-downs, Merrill went hat in hand to its shareholders for more capital. Since by then Merrill's share price had dropped substantially, a "reset" clause in Temasek's original purchase agreement kicked in. This "reset" clause basically said that if within 12 months of Temasek's first capital injection, Merrill issued new shares at a lower price, then Temasek would be compensated for the difference.

On this basis, Merrill returned US$2.5 billion to Temasek, which the latter reinvested in the bank, together with an additional US$900 million new capital. The sum was used to purchase US$3.4 billion more of Merrill stock at US$22.50 a share [5]. That gave the Singapore company the 14 per cent stake as mentioned above, making it Merrill's largest shareholder for a short while.

What Temasek intends to do now that Bank of America plans to take over Merrill Lynch, remains to be seen. In any case, the buy-out is subject to shareholder approval on both sides, so there may be more twists and turns yet.

* * * * *


Completely overshadowed by the Merrill near-death experience was another news item related to Temasek just before the same weekend. It lost its appeal in the Indonesian Supreme Court.

Temasek Holdings Pte, a Singapore state-owned investment company, lost an appeal against an Indonesian ruling that it violated the nation's anti-monopoly laws, Supreme Court Chief Justice Bagir Manan said.

The court upheld a ruling by the competition regulator, which said Temasek breached antitrust laws by using indirect stakes in PT Telekomunikasi Selular, known as Telkomsel, and PT Indosat to fix prices.

-- Bloomberg.com, 12 September 2008, Temasek Loses Indonesian Anti-Monopoly Ruling Appeal (Update2)


However, this decision may now be moot, as one of the two cellphone operators at the centre of this case was sold off to Qatar Telecom 3 months ago.

But let's start from the beginning:



In November 2007, the KPPU, Indonesia's Business Competition Supervisory Commission, fined Temasek and its subsidiaries and associate companies 25 billion rupiah each (about US$2.7 million) and required that it dispose of shares in Indosat or Telkomsel no later than two years after the verdict had come into permanent legal force. Even that divestment was subject to the condition that buyers were only allowed to buy a maximum of 5 percent of the total of disposed shares. Naturally, the buyers could not be affiliated to Temasek, KPPU ruled.

Temasek challenged the ruling in a Jakarta court. It lost that round too.

The Central Jakarta District Court on Friday upheld KPPU rulings against Temasek Holdings and subsidiaries for an antitrust violation, but revised the penalties.

"Since the KPPU (Business Competition Supervisory Commission) is the only commission in this country able to sentence businesses for uncompetitive acts, it should have been able to prevent such monopolistic practices from occurring in the first place," judge Andriani Nurdin told the appellate court.

"It is in this court's opinion, then, that its sentence for Temasek and its subsidiary companies is too harsh," he said.

The judges gave Temasek Holdings a choice to relinquish at least 50 percent of its shares in both PT Telkomsel and PT Indosat Tbk or let go all shares in either company within one year as ordered by the KPPU.

Judges added that the divested shares could be sold for up to 10 percent to each buyer, higher than the maximum of 5 percent mandated by the KPPU.

Judges fined Temasek and eight subsidiaries, plus the largest market shareholder Telkomsel, Rp 15 billion (US$1.6 million), which was less than the Rp 25 billion fine set by the KPPU.

-- Jakarta Post, 10 May 2008, Court lessens punishment for Temasek


However, a month later, on 8 June 2008, Temasek subsidiary Singapore Technologies Telemedia (STT) announced that it would sell its entire 40.8 percent stake in Indosat to Qatar Telecom for US$1.7 billion. STT had bought the stake in 2002 from the Indonesian government (then under President Megawati) for US$631 million. [6]



All that remains after that disposal is Temasek's indirect stake in Telkomsel. Except for the fines, which I suppose, still have to be paid.

What was really interesting to me was that:

The Supreme Court scrapped two clauses in an earlier ruling that prohibited Temasek from selling its holdings to affiliate companies and restricted each buyer to a maximum 10 percent stake, court spokesman Nurhadi said.

That removed any legal obstacle to the sale of the Indosat stake to Qatar Telecom, said Ananda Lukmansyah Sjarkawi, an analyst at PT Andalan Artha Advisindo Sekuritas. "There shouldn't be any problem now with the stake sale" because of the Supreme Court's decision to ease those restrictions, he said.

--- Bloomberg.com, 12 Sept 2008, Temasek Loses Indonesian Anti-Monopoly Ruling Appeal (Update2)


Isn't that rather mysterious? Qatar Telecom seemed confident enough back in June that the eventual ruling would go like this, and that they would not subsequently have to divest their new 40.8 percent stake in 10 percent portions. They were so confident that it was even stated when they bought the stake from STT that the sale was irreversible, whichever way the Supreme Court decision would later go.

How could they be so sure? Is there more to it than what's reported? In the weekend when the news, even here in Singapore, was all about Lehman Brothers and Merrill Lynch, that one little mystery remained.

© Yawning Bread

 

[quixot]

Read between the line again, still not done deal yet.
And market is not buying this idea 100%.
It COULD earn some money, but it IS losing money at this very moment.

MER is around U$20 now, still below Temasek's cost.