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Bank of America to buy Countrywide Financial for $4 billion
Paying $4 billion, entirely in stock, to become nation's top mortgage lender
By Alistair Barr
Last Update: 8:59 AM ET January 11, 2008
NEW YORK (MarketWatch) -- Bank of America Corp. said on Friday it's purchasing Countrywide Financial Corp. for $4 billion, effectively doubling down on a previous investment in the troubled firm and catapulting the buyer into the top spot among mortgage lenders and loan servicers in the U.S.
The stock-swap deal will put an end to the independence of the troubled California lender headed by Angelo Mozilo, and represents an increase from the Charlotte, N.C., bank's August investment of about $2 billion.
"We believe this is the right decision for our shareholders, customers and employees," said Mozilo, Calabasas, Calif.-based Countrywide's (CFC) chairman and chief executive, in a statement.
Terms call for Countrywide stockholders to receive 0.1822 of a share of Bank of America (BAC) stock in exchange for each share they own.
At Thursday's close, that values Countrywide at $7.16 a share -- lower than the $7.75 closing price after news leaked of a possible deal.
Countrywide's shares fell 15%, dropping $1.22 in Friday's pre-open trading to $6.53.
The purchase is expected to close in the third quarter. It's expected to be neutral to Bank of America earnings per share in 2008 and contribute to the buyer's bottom line in 2009, excluding merger and restructuring costs.
Bank of America expects $670 million in after-tax cost savings in the transaction, fully realized by 2011.
Thursday rally signaled deal
Countrywide shares soared 51% to close at $7.75 on Thursday, after The Wall Street Journal reported the two financials were in advanced talks.
The news also buoyed other leaders in the troubled mortgage industry, including Washington Mutual (WM) , shares of which jumped 15% to $14.16.
Bank of America's shares, meanwhile, rose 1.5% to $39.30.
For Bank of America, an acquisition is risky but could generate big gains if the mortgage markets were to stabilize, analysts said. The bank is a leader in retail deposits and is a big commercial lender and credit-card issuer, but it hasn't expanded as much in mortgages.
"The potential payoff if things improve is very big for Bank of America," said Kathleen Shanley, analyst at Gimme Credit, in an interview before the deal was announced.
"Countrywide is the largest mortgage franchise in the country, and it's a huge servicer. But we don't know how long the mortgage downturn will last and how bad the mortgage losses will ultimately be."
Countrywide has been hit hard by surging home-loan delinquencies and foreclosures. The company's shares have slumped nearly 90% in the past year, and earlier this week the company was forced to deny market speculation that it was close to filing for bankruptcy.
For its part, Bank of America has already stepped in to aid Countrywide. In August, the bank invested $2 billion in the mortgage lender by buying preferred securities that could be converted into stock at $18 a share in the future.
But since then, the mortgage crisis has spread and deteriorated into a global credit crunch. Countrywide's shares traded above $25 after the August deal.
'Jubilation'
Without a deal, Countrywide was set to face serious credit and liquidity problems, Shanley warned.
Countrywide debt due in 2016 was trading at roughly 41 cents on the dollar before news of a potential deal broke Thursday, while the company's bank debt was changing hands at about 70 cents on the dollar, she said.
Countrywide used to package up the home loans it originated as mortgage-backed securities and sell them to institutions such as hedge funds, insurers, and pension funds. But surging delinquencies and foreclosures handed hefty losses to some of these investors, and the secondary mortgage market froze up in the summer.
That left Countrywide without its main source of cash with which to keep offering new mortgages. The company borrowed more than $10 billion from banks and started funding a lot of its loans with retail deposits from its thrift unit, Countrywide Bank.
It also borrowed a lot of money from the government, through the Federal Home Loan Bank of Atlanta, and sold conforming mortgages to government-sponsored enterprises like Fannie Mae (FNM) and Freddie Mac (FRE) .
But those lifelines began dwindling in recent months, putting Countrywide in the position of seeking more of the financial support it needed from other sources.
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