Bank of America to Acquire Countrywide for $4 Billion
Published January 11, 2008 by Shane CookBy David Mildenberg
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Jan. 11 (Bloomberg) — Bank of America Corp., the biggest U.S. bank by
market value, agreed to buy Countrywide Financial Corp. for about $4
billion, five months after making a $2 billion investment in the
unprofitable mortgage lender.
Bank of America will acquire Countrywide for about $7.16 a share in
stock, the Charlotte, North Carolina-based company said in a statement
today. The offer is 7.6 percent below Countrywide’s closing price on the
New York Stock Exchange, and the stock fell 15 percent today at 9:41
a.m. to $6.62. Bank of America fell 62 cents, or 1.6 percent, to $39.11.
“I hope Bank of America isn’t throwing good money after bad,” said
Eric Schopf, a fund manager at Baltimore-based Hardesty Capital
Management LLC, which owns 216,000 Bank of America shares, in a
Bloomberg TV interview. “They struck a deal that wasn’t very
attractive. Hopefully they can get it right the second time around.”
Bank of America Chief Executive Officer Ken Lewis is doubling down on
the U.S. mortgage market as the housing slump enters its third year, the
worst streak since 1982. The takeover of Calabasas, California-based
Countrywide increases Bank of America’s dependence on the slowing
domestic economy, where it gets more than 85 percent of its revenue.
Countrywide, the largest independent U.S. mortgage company, gives Bank
of America about 9 million borrowers and fees from servicing $1.5
trillion of mortgages. Countrywide’s market value plummeted 82 percent
to $4.5 billion during the past 12 months as the lender reported its
first quarterly loss in 25 years.
Restructuring Costs
Lewis, who said last month he preferred to expand the company’s mortgage
business internally, called the Countrywide purchase a “unique
opportunity” during a conference call today. The transaction will
result in a $1.2 billion restructuring charge, the company said.
The combined company won’t make subprime loans, said Bank of America.
Mortgages to people with weak credit contributed to a surge in defaults
last year.
“We are aware of the issues within the housing and mortgage
industries,” Lewis said in the statement. “The transaction reflects
those challenges.”
Bank of America was sitting on a potential loss of about $1.3 billion
from its stake in Countrywide before reports of an impending sale
boosted the mortgage lender 51 percent.
Washington Mutual Inc., the largest U.S. thrift, rose 6.1 percent on
speculation that it will be bought by JPMorgan Chase & Co., the No. 3
U.S. bank by assets.
Mozilo’s Future
Countrywide CEO Angelo Mozilo will stay until the sale is completed,
said Lewis, adding that Mozilo probably will “want to have some fun”
after the deal closes.
The risk of Countrywide defaulting plummeted after the deal was
announced. Credit-default swaps on the company fell to 325 basis points,
according to Phoenix Partners Group. Investors yesterday sought 7.25
percentage points upfront and 500 basis points a year for five years to
protect Countrywide bonds. Contracts on Bank of America fell 5 basis
points to 75.
The purchase, expected to close in the third quarter, will add to
earnings beginning in 2009, Bank of America said. Savings resulting from
the combination will be about $670 million, with about a third of that
coming next year, the bank said.
Bank of America was advised in the transaction by Banc of America
Securities and the law firms of Cleary, Gottlieb, Steen & Hamilton LLP
and K&L Gates. Countrywide was advised by Sandler O’Neill & Partners LP
and Goldman Sachs Group Inc. Wachtell Lipton Rosen & Katz was
Countrywide’s legal adviser.
Preferred Stock
Countrywide, founded in 1969 by Mozilo, sold $2 billion of preferred
stock to Bank of America in August to bolster its finances amid what
Mozilo called the worst housing slump since the Great Depression. The
stock offers a yield of 7.25 percent and is convertible into common
shares at a price of $18, 57 percent above yesterday’s closing price.
Rising defaults among subprime borrowers, those considered at the
highest risk of missing their payments, blocked Countrywide from its
traditional sources of capital in the credit markets. More than 100
mortgage companies halted loans, closed or sold themselves last year.
Credit losses and writedowns tied to the collapse of U.S. mortgage
markets at the world’s biggest financial companies total about $100
billion, according to Bloomberg data.
The takeover of Countrywide is a fraction the size of previous deals
engineered by Lewis, including the $48 billion purchase of FleetBoston
Financial Corp. in 2004 and $35 billion acquisition of credit-card
lender MBNA Corp. in 2006.
Stock Reaction
Lewis is still grappling with fallout from the 93 percent drop in
third-quarter profit at the company’s investment-banking unit. He cut
500 jobs, ousted the head of the unit and vowed to scale back risk.
Consumer banking accounts for about half of Bank of America’s earnings.
Countrywide’s market value fell below $3 billion this week for the first
time in a decade amid renewed concern that the company was going
bankrupt, a rumor the company denied. The speculation may have driven
Countrywide’s price down to an attractive level, said Robert Pardes, the
former head of OceanFirst Financial Corp.’s Columbia Home Loans unit in
New Jersey, which closed last year.
`Great Technology’
“It is an absolute opportunity for Bank of America to acquire an
infrastructure they admire, including Countrywide’s great technology,
and, at these levels, it’s mitigating most of the asset issues,” he said.
Countrywide traded as high as $45.26 last January and the workforce
peaked at 61,586 in July before declining 18 percent to 50,600 at the
end of 2007. Monthly loans, which set a record at $53 billion in August
2005, have averaged about half that amount for the past four months.
Speculation about bankruptcy surfaced last year after investors balked
at buying Countrywide’s short-term debt and concern about rising
defaults brought markets where the company sold its mortgages to a
standstill. The lender tapped emergency credit lines and arranged a
bailout from Bank of America.
At the end of 2007, more than 7 percent of payments in the company’s
$1.5 trillion servicing portfolio were more than 60 days overdue.
To contact the reporter on this story: David Mildenberg in Charlotte at
dmildenberg@bloomberg.net
/Last Updated: January 11, 2008 09:46 EST/
Shane Cook
Senior Mortgage Specialist
First Horizon Home Loans
(Office) 800-256-7887
(Cell) 252-207-2665
(Fax) 866-669-5871
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