July 16 (Bloomberg) -- Merrill Lynch & Co., the third- biggest U.S. securities firm, dropped efforts to sell a stake in BlackRock Inc. and struck a deal to sell its 20 percent share of Bloomberg LP, according to people familiar with the decision.

Merrill, poised to report a second-quarter loss tomorrow, stood to gain about $2 billion on its 49.8 percent stake in BlackRock, the largest publicly traded U.S. fund manager, based on its current market value. BlackRock fell 17.5 percent in New York trading this year, partly on concern Merrill would divest its holding.

Merrill agreed to sell its investment in Bloomberg LP, the parent of Bloomberg News, for $4.5 billion, a person familiar with Merrill's plans said. Merrill is financing the sale to Bloomberg, said the person, who declined to be identified because the terms haven't been announced.

Chief Executive Officer John Thain is selling assets as analysts at Citigroup Inc., Oppenheimer & Co. and Wachovia Corp. predict the company will report at least $5 billion of credit- market writedowns when it announces second-quarter results tomorrow. Merrill will probably post a loss of $3.95 a share, the Citigroup analysts estimate. That compares with earnings of $2.24 a year earlier.

``They needed to do something to provide confidence in Merrill's balance sheet,'' said Ryan Lentell, an analyst at Morningstar Inc. in Chicago. ``You don't want there to be any possibility that somebody can question your capital structure.''

Credit-Market Losses

Jessica Oppenheim, a spokeswoman for Merrill, declined to comment. BlackRock CEO Laurence Fink declined to comment through a spokeswoman. Bloomberg spokeswoman Judith Czelusniak also declined to comment. All the firms are based in New York.

Thain, 53, has raised $17.9 billion since December from investors including Temasek Holdings Pte, Singapore's sovereign wealth fund. Merrill's $38.2 billion of writedowns and credit losses since the beginning of last year are the third-largest among banks and brokerages hit by the credit-market contraction, after Citigroup and UBS AG, data compiled by Bloomberg show.

Merrill rose $3.31, or 13 percent, to $28 in New York Stock Exchange composite trading. BlackRock climbed $14.77, or 9 percent, to $178.95.

Oppenheimer's Meredith Whitney predicted in a July 2 report that Thain would raise cash by selling stakes in BlackRock and Bloomberg before announcing earnings. On its books, Merrill values the BlackRock holding at about $8 billion. It's worth about $10 billion, based on the company's market value.

`Gold Mine'

Thain said in a June 11 conference call that the company's 20 percent share of closely held Bloomberg was worth about $5 billion to $6 billion.

``BlackRock is a gold mine,'' Sanford Bernstein & Co. analyst Brad Hintz said in a July 2 interview. ``One should worry strategically about the future of a Merrill if they were forced to actually sell BlackRock because their real intention is to go in the direction of more of an asset management business model.''

Merrill's agreement to sell its stake in Bloomberg LP back to its corporate parent, Bloomberg Inc., may be announced as soon as tomorrow, the person familiar with Merrill's plans said.

Bloomberg is majority owned by New York City Mayor Michael Bloomberg.

Merrill President Greg Fleming and principal investments chief Todd Kaplan negotiated the deal with Quadrangle Group LLC managing principal Steven Rattner, who oversees the mayor's fortune, and Martin Geller, his financial adviser, the person said. Geller is a member of Bloomberg LP's board.

`Strategic Asset'

Merrill's $30 million investment in Bloomberg dates back to 1985. The firm was Bloomberg's first customer in 1981 and gained an advantage over rivals with up-to-date bond pricing information, according to Michael Bloomberg's 1997 biography.

By 1990, Merrill held a 30 percent stake in Bloomberg. In 1996, Bloomberg paid Merrill $200 million to pare down its investment to the current 20 percent.

The BlackRock investment is more recent and larger. In October 2006, Merrill traded its money-management arm, Merrill Lynch Investment Managers, for a 49.8 percent stake in BlackRock in an asset swap valued at the time at $9.4 billion. BlackRock's longtime corporate parent, PNC Financial Services Group Inc. of Pittsburgh, holds 35 percent of the shares.

Thain told investors as recently as April that he had no plans to sell Merrill's stakes in Bloomberg or BlackRock, which he called that month a ``core strategic asset.''

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: July 16, 2008 19:01 EDT