Merrill Lynch has just announced the pricing for the $8.55 billion share offering that it is conducting to raise capital and help improve its balance sheet. The offering will be for 380 million shares at a  price of $22.50.

Even though the new offering, which will dilute current shareholders, is priced at $22.50, the stock is now trading at $24.90, 10.6% higher than the price the new shareholders will be buying in for. Unless there is more “good” news in the days ahead from Merrill Lynch, the stock should move to the downside over the next few days. Wall Street does not like dilution.

Merrill Lynch has been nothing but negative news this week. It is selling assets on its book at just cents on the dollar, it is financing the purchase of those assets, so to some degree, the balance sheet liability still remains and it is paying Temasek Holdings which is buying the bulk of the stock in the new offering, $2.5 billion to make up for losses in stock that Temasek had bought previously.

Quick back of the envelope calculations, makes one wonder  by how much exactly will the transaction help out MER’s capital position? Merrill Lynch is raising $8.5 billion in a stock offering, but will only get a check for $6 billion, if our math is correct, as it now owes Temasek, $2.5 billion. Temasek by the way is only putting in $3.4 billion not factoring the $2.5 billion they are getting back, into Merril Lynch, with this capital raising.

Merrill Lynch is also selling $30 billion dollars worth of CDOs for $6.7 billion and is financing 75% of this. So we assume that it is only getting $1.675 billion in cash upfront from this. So for what amounts to a $15.25 billion capital raising, Merrill Lynch will only be getting roughly $7.725 billion upfront.

Temasek’s initial investment back in December 2007, was for $4.4 billion. With the drop in Merrill Lynch’s stock price since then, it now has to pay back Temasek $2.5 billion. So one big question facing Merrill Lynch now is whether it can keep its stock price up, since Temasek and we assume anyone else buying into the company’s stock offerings this time around, is only buying in on the condition that Merrill Lynch makes up any difference if there is a drop in the price of Merrill Lynch’s stock.

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