GE seals deal to buy lending unit

General Electric Co. has reached an agreement to buy one of its main competitors in the market to finance mid-sized leveraged buyouts, according to Buyouts, an affiliated publication to PE Week. A formal announcement of GE’s acquisition of the mid-market lending division of Merrill Lynch & Co. was expected late last week.

With the purchase of Merrill Lynch Corporate Finance, GE appears to be cementing its position as the top supplier of senior debt to finance mid-market LBOs. Its Antares unit, which was built through acquisitions, boasts at being the No. 1 provider of senior loans of less than $225 million.

GE has agreed to pay between $1.02 and $1.03 for every dollar of Merrill Lynch Corporate Finance’s book value, according to a source familiar with the deal. It’s unclear what value that would place on the unit. “GE ended up being an aggressive buyer because they have to show growth,” the source says. “They do that through acquisitions.”

Merrill Lynch put its entire mid-market commercial lending division, Merrill Lynch Capital, on the block over the summer. The goal was to raise cash to help offset huge, multi-billion-dollar write-downs in its fixed-income division. The investment bank planned to wrap up the sale by the end of the year.

GE emerged as the primary bidder last month, but negotiations stalled because GE wasn’t interested in buying all of Merrill Lynch Capital. The Chicago-based division includes Merrill Lynch Corporate Finance, which provides senior and mezzanine loans to back LBOs, as well as three other groups that underwrite equipment, real estate and health care debt.

Merrill Lynch is holding on to its real estate unit, according to the source.

Merrill Lynch’s plans for the other groups in the commercial lending division are unclear.

GE built its mid-market lending business in 2001 when it spent more than $5 billion to buy Chicago-based Heller Financial. By many accounts, the integration of that firm did not proceed well, and dissidents from Heller Financial bolted to launch the rival shop at Merrill Lynch in 2002. GE was more careful with the 2005 acquisition of Chicago-based Antares, which was also formed by former Heller Financial pros in the 1990s.

“GE learned from its Heller mistake and did a good job of pulling in Antares,” says the source, who adds that Antares has thrived operating independent from GE.

The deal for the Merrill Lynch lending unit figures to be different, however. GE would likely offer jobs to a small number of top-performers, and let the rest go, according to another source familiar with the deal. GE would be “eliminating a competitor, buying up a portfolio and getting a few super stars,” our source continued. “GE is very disciplined about weeding out the people it thinks are the best.”

The auction for Merrill Lynch Capital drew interest from a handful of suitors, including a few European banks and LBO firms such as Cerberus Capital Management, J.C. Flowers & Co. and TPG.