Bank of America to Acquire Countrywide for $4 Billion (Update8)
By David Mildenberg
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, taking over the largest mortgage
lender during the worst housing slump in more than two decades.
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, 7.6 percent less than the previous days
closing price. The bank will become the nations dominant home
lender, originating one of every four mortgages, and extend the
companys lead over Citigroup Inc. in U.S. deposits, where Bank
of America already controls almost 10 percent.
Ken Lewis, Bank of Americas chief executive officer, is
doubling down on the U.S. mortgage market as home sales fall for
a third straight year, the worst streak since 1982. The takeover
of Calabasas, California-based Countrywide increases Bank of
Americas dependence on the slowing domestic economy, where it
gets more than 85 percent of its revenue, and follows a
$2 billion investment in Countrywide last August.
“I hope Bank of America isnt throwing good money after
bad, said Eric Schopf, a fund manager at Baltimore-based
Hardesty Capital Management LLC, which invests almost $700
million and owns 216,000 Bank of America shares, in a Bloomberg
TV interview. “They struck a deal that wasnt very attractive.
Hopefully they can get it right the second time around.
Countrywide stock fell 18 percent in 4:17 p.m. New York
Stock Exchange composite trading to $6.33, after soaring 51
percent yesterday when the Wall Street Journal reported the
negotiations. Bank of America lost 80 cents to $38.50 and set a
four-year low of $37.16 during the day.
Expanding Mortgages
Lewis said last month he preferred to expand his companys
mortgage business internally and that any purchase would have to
be “pretty compelling. Countrywide, founded in 1969 by Chief
Executive Officer Angelo Mozilo, gives Bank of America about 9
million borrowers to whom it can sell other products, and fees
from servicing $1.5 trillion of mortgages.
Countrywides market value has plummeted 85 percent to
$3.66 billion during the past 12 months as the lender reported
its first quarterly loss in 25 years. Lewis has said the U.S.
housing slump probably wont bottom until mid-2008.
“There are near-term challenges, but where there are
challenges, there are always opportunities, Lewis said during
a conference call today. “We view this as a one-time
opportunity.
Charges Ahead
Adding Countrywides $209 billion in assets to Bank of
Americas $1.6 trillion would leave the combined companies
second in size to Citigroup, which had $2.35 trillion in assets
as of Sept. 30.
The transaction will result in a $1.2 billion restructuring
charge as Bank of America cuts the expenses of the companies
mortgage units by 11 percent. Bank of America plans to issue
about $2 billion in capital, Chief Financial Officer Joe Price
said.
Declines in the value of home loans held by Countrywide and
pending litigation are reflected in the purchase price, Lewis
said. While the housing market will weaken this year and the
market for buying home loans remains “fragile, Bank of
America expects to gain market share, Lewis said. The combined
companies will handle 25 percent of U.S. mortgage originations
and a 17 percent share of servicing, which involves billing and
collections. No government financial support was provided for
the transaction, Lewis said.
Avoiding `Cocaine
The combined company wont make subprime loans and will
limit its purchases of large packages of loans from other
lenders, Lewis said.
“I dont like the cocaine of large bulk purchases, he
said.
Mortgages to people with weak credit contributed to a surge
in defaults last year. Bank of America, Wells Fargo %26amp; Co., and
other big mortgage lenders have reduced their loan purchases
from independent mortgage brokers, citing credit concerns.
“Theres a tendency for people to underappreciate the risk
of the housing market, said Robert Shiller, an economics
professor at Yale University in New Haven, Connecticut, and co-
creator of the S%26amp;P/Case-Shiller Price Indexes. “I might have a
lower valuation of Countrywide than Bank of America does. He
later said in an interview today that “the housing situation
continues to worsen and its not as surprising to me as it is to
other people.
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.
Credit Review
Bank of Americas financial strength rating is under review
for a possible downgrade because of integration, litigation and
mortgage value challenges, Moodys Investors Service said today.
Moodys affirmed the banks short-term ratings.
Countrywides lending practices are under investigation by
attorneys general in California and Illinois, while the
Securities and Exchange Commission is looking into potentially
improper trading by Mozilo and other company officials,
according to a person familiar with the matter.
The acquisition was criticized as a bailout that doesnt
help individual borrowers in separate statements by the Service
Employees International Union and the Rev. Jesse Jackson,
president of the Rainbow PUSH Coalition. Curbing growth of the
biggest U.S. banks should be a bigger priority than saving
Countrywide, the 1.9 million-member SEIU said in a statement.
Bank of America was sitting on a potential loss of about
$1.3 billion from its $2 billion investment last August in
Countrywide before reports of an impending sale boosted the
mortgage lenders stock yesterday.
Preferred Stock
Countrywide sold 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 yesterdays closing price.
Mozilo, 69, will stay until the sale is completed, said the
60-year-old Lewis, who plans to meet with Mozilo next week.
Mozilo probably will “want to have some fun after the deal
closes, Lewis said. Mozilos contract may entitle him to a
package as high as $83 million, according to compensation
consultant Brian Foley.
Bank of America will need to write down the value of
Countrywides $209 billion in assets by as much as 10 percent,
or $20 billion, because of lower housing values, said Sean Egan,
managing director of Egan-Jones Rating Co., a Philadelphia
credit rating company.
“The $4 billion paid to the shareholders is a minor part
of the overall transaction cost, Egan said.
Housing Outlook
The worsening housing market makes Bank of Americas timing
questionable, said Kyle Bass, a portfolio manager at Dallas-
based hedge fund Hayman Capital Partners LP, which manages more
than $2 billion.
“The collateral for their loans is depreciating at over 20
percent a year, losses are spiking and theres a big potential
`fat tail to Countrywides legal liabilities, he said. Hayman
sold Countrywides shares short recently and has started betting
against Bank of Americas stock and bonds, Bass said.
Bank of America was advised in the transaction by Banc of
America Securities and the law firms of Cleary, Gottlieb, Steen
%26amp; Hamilton LLP and K%26amp;L Gates. Countrywide was advised by Sandler
ONeill %26amp; Partners LP and Goldman Sachs Group Inc. Wachtell
Lipton rosen %26amp; Katz was Countrywides legal adviser.
Cash Crunch
Rising defaults among subprime borrowers 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
worlds biggest financial companies now total about $100
billion, according to data compiled by Bloomberg.
Countrywide may represent the opportunistic deal-making
that turned regional bank NCNB Corp., which Lewis joined as a
credit analyst in 1969, into the most valuable U.S. bank. He was
former Bank of America Corp. CEO Hugh McColl Jr.s Texas point
man in 1988 after the government-assisted rescue of failing
First Republic Bank, the largest bank in the Lone Star State.
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.
Investment Bank
Lewis is still grappling with fallout from the 93 percent
drop in third-quarter profit at the companys 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 Americas earnings.
Countrywides 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 Countrywides 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.
“It is an absolute opportunity for Bank of America to
acquire an infrastructure they admire, including Countrywides
great technology, and, at these levels, its 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.
At the end of 2007, more than 7 percent of payments in the
companys $1.5 trillion servicing portfolio were more than 60
days overdue.
Looking Ahead
Bank of America may get relief from the 10 percent federal
cap on the amount of deposits a bank can hold after a merger or
acquisition. After the company bought ABN Amro Holding NVs
LaSalle Bank unit last year, its share of U.S. deposits reached
9.88 percent, the Federal Reserve estimated.
Washington Mutual Inc., the largest U.S. thrift, rose as
much as 7.8 percent today after CNBC reported it may be bought
by JPMorgan Chase %26amp; Co., the No. 3 U.S. bank by assets.
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.
To contact the reporter on this story:
David Mildenberg in Charlotte at
