Bank Of America’s Deal For Countrywide Face Hurdles >BAC CFC

Last Update: 2/1/2008 6:49:00 PM

By Riley McDermid

Bank of America Corp.’s (BAC) planned acquisition of distressed mortgage company
Countrywide Financial Corp. (CFC) may have hit a major snag this week when hedge
SRM Global Fund unveiled its 5.2% stake in the target, issued a blistering attack
on Bank of America and asked the SEC to investigate trading ahead of the
announcement.

SRM said it would vote against the deal, and other parties filed lawsuits,
highlighting the rocky road the firms still face on the way to the altar.

“We think that the board of the company and its advisers should fully explain to
shareholders the reasons why they have agreed to recommend the transaction to
shareholders at less than half of the company’s book value, and explain what
circumstances have changed since the company’s [third-quarter 2007] earnings,”
the SRM filing said.

The developments could signal that Bank of America will have to renegotiate a new
sales price or scrap the deal altogether.

Bank of America announced Jan. 11 that it would acquire Countrywide in the third
quarter of 2008 for $4.1 billion in an all-stock deal. Market participants are
closely watching how the deal plays out, its outcome will likely set a blueprint
for the way other firms resolve their problems, and just what troubled assets at
many firms are worth.

Under the terms of the agreement, investors in the lender would receive a 0.1822
Bank of America share for each Countrywide share they currently own. Bank of
America holds a 16% stake in the lender after investing $2 billion in August.

But hedge fund SRM Global, led by former star UBS trader Jon Wood, is trying to
put the brakes on any sale, and submitted a blistering filing to the Securities
and Exchange Commission on Jan. 24.

Bank of America fought back, with bank spokesman Scott Silvestri telling
MarketWatch on Thursday, “the transaction price was negotiated and we believe it
was fair for both companies.”

Building The Position

SRM acquired a 5.2% stake in the Calabasas, Calif.-based company after snapping
up more than 30 million shares of the lender from Nov. 28 through Jan. 24. The
hedge fund rode the market’s ambivalence about the share price during that time
and paid anywhere from $5.20 to $9.12 per share. SRM’s total investment is now
valued at about $200 million.

The Cayman Islands-based hedge fund said that it will vote against the
transaction and upped the ante by adding it will ask the Securities and Exchange
Commission to investigate movements in the company’s stock price in the days
before the announcement of the merger.

It also demanded Countrywide provide proof of its efforts to survive as an
independent concern prior to soliciting the Bank of America bid. SRM said any
potential acquisition of the lender should “induce alternate bids to maximize
value for all shareholders.”

Analysts watching from the sidelines said they expect that the acquisition will
be completed eventually, but at a potentially different price point.

“We expect the deal to go through. However, with mortgage credit deterioration
still accelerating, we have little confidence that the price won’t be
renegotiated,” Chris Brendler, a Stifel Nicolaus analyst who follows Countrywide,
wrote in a note Wednesday. Brendler said he would maintain his “hold” rating on
the stock.

The uncertainties surrounding the deal have sent Countrywide’s share price all
over the board in the past two weeks, with the stock sometimes trading at as much
as a 20% discount to the offer price.

Fighting on several fronts

Both companies may be in for a fight - SRM has some experience battling a major
fire sale. It is the largest shareholder in failed British bank Northern Rock and
joined with fellow hedge fund RAB Capital in pressing Northern Rock to require
managers to seek shareholder approval for even the smallest of asset sales. That
measure failed in a shareholder vote.

Gary Gordon, an analyst for Portales Partners who has been following Countrywide
for almost two decades, estimates SRM is unlikely to find any allies among other
Countrywide shareholders.

“It was essentially a management judgment call about how difficult the financing
and legal risks would be [for the deal],” he said. Most shareholders are likely
satisfied that Countrywide did its due diligence before advancing the idea of a
sale, he said.

Bank of America, too, is facing shareholder opposition. It is currently facing
three class-action lawsuits filed by shareholders alleging that Bank of America’s
acquisition will hurt the bank’s stock and will only help Countrywide officers
escape personal liability for the lender’s woes.

The legal and regulatory issues involving the lender are sure to only intensify
over the next year, as Countrywide faces multiple lawsuits at a variety of
jurisdictional levels across the country. It is this regulatory pressure that may
have hastened the sale of the company in the first place, some analysts say, rock
bottom price or not.

“Given the magnitude of the credit problems in the bank and Countrywide’s plan to
continue to grow it with credit sensitive assets and hot deposits, we believe the
regulators likely forced management’s hand,” Brendler said.

Based on the lender’s Dec. 31 balance sheet, Wall Street currently puts the book
value of Countrywide at $22 a share. Countrywide had $37 billion of available
liquidity at year-end.

Countrywide reported a loss of $422 million for the fourth quarter on Tuesday,
and more than twice the consensus view of analysts the previous week. The loss
was the first in the company’s 25-year history, with overdue loans increasing to
7.2% from 4.6% and more than a third of its subprime loans in active default.

That was a marked departure from Chief Executive Angelo Mozilo’s pledge two
months ago that he would return the lender to profitability by the end of the
year.

But is Countrywide getting out just as conditions for lenders begin to improve?

The company has recently seen an uptick in deposits at its savings bank and
should reap the rewards of Fannie Mae (FNM) and Freddie Mac’s (FRE) new ability
to purchase jumbo loans.

In addition, a spate of new interest rate cuts introduced by the Federal Reserve
could make the borrowing environment even more hospitable to strapped lenders.
Gordon also points out that the value of Countrywide’s existing loan origination
and loan servicing platforms alone make it a very valuable asset.

“There is a big shortage of loan servicers right now, and at this price, they
basically gave it to them for nothing,” Gordon said.

The infrastructure and existing loan portfolio that Bank of America inherit as
part of the deal would make it the nation’s largest mortgage lender, a
significant leap from the fifth place spot the bank held in 2007. Analysts
estimate that if the deal does go through, Bank of America will eventually
oversee or originate close 25% of all home mortgages.

Close to 90% of the mortgage business is now in the hands of the top 25 lenders,
making an acquisition on the scale of Countrywide’s unlikely to come along any
time soon. Still, there are opportunities for smart bargains.

“A lot of the consolidation that happens in ‘08 will be through bankruptcy,” he
said. These could provide valuable sales of piecemeal assets, allowing many banks
and lenders to snap up essential origination and servicing platforms at bargain
basement prices.

It may be for this reason precisely that Bank of America is staying firm in its
resolve to go through with the deal. CEO Kenneth Lewis told a New York audience
that despite the significantly larger losses, the bank will forge ahead with the
acquisition, saying that the original deal is still “a go.”

Lewis’s confidence could be rewarded, analysts said, as there are few possible
suitors sitting on the sidelines.

“I’d be hard pressed to say there’s a better buyer out there,” Gordon said.

-Riley McDermid; 415-439-6400; AskNewswires@dowjones.com

(END) Dow Jones Newswires

February 01, 2008 18:49 ET (23:49 GMT)

Did you like this? If so, please bookmark it,

$\\$

about it, and subscribe to the blog RSS feed.

Possibly Related Posts: