Merrill exit would bruise, not batter BlackRock

By Muralikumar Anantharaman - Analysis

BOSTON (Reuters) - Asset manager BlackRock Inc (BLK.N) can ride out an exit by its biggest shareholder, Merrill Lynch MER.N, but its investors may feel the pain in the short-term as more of its shares may trade freely.

The sale of Merrill's 49.8 percent stake in whole or part in the largest publicly traded U.S. money manager looks increasingly likely, many analysts believe, as the brokerage comes under pressure to raise new capital amid what may be billions of dollars in additional write-downs.

"From a fundamental standpoint, I don't think it would be that big of an issue for BlackRock. But any time you have 40 percent of shares potentially coming to market, you are going to see a significant near-term hit to the stock," said Michael Kim, an analyst at Sandler O'Neill & Partners.

BlackRock's other big shareholder is PNC Financial Services Group (PNC.N), which has a 34 percent stake. The asset manager bought Merrill's funds unit for $9.5 billion in 2006, the biggest purchase yet in the U.S. fund industry, in exchange for the stake.

As per the terms of that deal, Merrill can't sell its holding till October 2009 and sales thereafter are subject to restrictions. But hurt by the credit crisis, Merrill said in June it would consider selling the BlackRock stake and its 20 percent stake in financial news and data provider Bloomberg.

BlackRock employees own roughly half of the remaining stock, which means that the tradable shares are less than 9 percent of its 118 million outstanding shares. Some analysts say the paucity of tradable shares has been a contributor to BlackRock's 53 percent stock gain in 2007 and into early 2008.

PREMIUM VALUATION

"Part of the premium that BlackRock always enjoyed was partly due to the fact that there was a small float on the stock," said Roger Smith, analyst at Fox-Pitt, Kelton.

It remains unclear how Merrill would sell its BlackRock stake. A spin-off would be a possibility, but so would a sale to a sovereign wealth fund or other investor. Still, the potential of more shares coming to market is likely to depress the share price until the question is resolved.

BlackRock shares have already taken a beating on these concerns since June 10 and underperformed peers, losing 16.5 percent through the end of June against the 8.5 percent drop in the S&P asset management and custody banks index.

That has brought its valuation closer to its peers. BlackRock now trades at 16.6 times 2009 earnings against a little over 16 times for the group.

The stock has historically commanded a 20 percent premium to its peers which rose to 35 percent early in the second quarter as it has outshone peers, according to Goldman Sachs.

"I would still think that the company should continue to trade at a premium to the group. It just might not be as large a premium as it has been in the past," said Smith. BlackRock shares closed on Tuesday at $176.03, down 0.6 percent.

Some BlackRock investors saw a beneficial impact to the stock from a whole or partial Merrill stake sale.

"You would potentially increase the float of the stock and attract new investors. That can usually be a positive thing. The premium will usually be due to corporate performance," said Mark Baribeau, chief investment officer of large-cap growth equity at Loomis Sayles & Co, which owns BlackRock shares.