Rare Opportunity for BofA?
As expected, Bank of America announced this morning that it would buy struggling mortgage lender Countrywide Financial for $4.1 billion in stock, rescuing the nation’s top lender while bolstering its own position.
“Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers,” Bank of America CEO Ken Lewis said in a statement.
Shareholders of Countrywide will receive 0.1822 of a share of Bank of America stock in exchange for each share of Countrywide, representing a 7.5 percent discount from Thursday’s close.
“We believe this is the right decision for our shareholders, customers and employees,” said Angelo Mozilo, Countrywide chairman and chief executive in a statement.
The deal, which is expected to close in the third quarter, shouldn’t affect Bank of America’s earnings per share in 2008 and may actually lift EPS in 2009, excluding buyout and restructuring costs.
Bank of America is expected to take a $1.2 billion restructuring charge related to the buyout, and said it would recognize $670 million in after-tax cost savings in the transaction, fully realized by 2011.
Most importantly, the acquisition will make the Charlotte-based bank the largest mortgage lender and loan servicer in the United States.
In the meantime, Bank of America plans to let Countrywide operate separately under its own brand, with no planned integration until 2009.
Lewis noted that he would like Countrywide CEO Angelo Mozilo to stay on until the deal is ultimately completed.
“Angelo has told me that he will do anything that we want him to do,” Lewis said. “I would guess that he’ll want to go have some fun. I will talk with him next week about his personal desires. Many of the senior people will have big operating roles in this company.”
15,000 Countrywide Jobs at Risk
It’s unclear how many layoffs will be seen as a result of the deal, but it’s very likely that a reasonable amount of the 15,000 remaining Countrywide employees will be let go.
S&P said it may raise its rating on Countrywide based on the news, but warned it could reverse course, and review the company for a possible downgrade if the merger fails.
“The CreditWatch Positive placement reflects the higher rating on Bank of America and the benefits Countrywide will receive,” S&P said in a news release.
S&P currently awards Countrywide a “BBB-plus” rating, the third-lowest investment-grade ranking.
The rating agency plans to make its decision around the time the transaction is completed, likely raising its rating to that of Bank of Americas’s, an “AA” rating, which is the third highest investment-grade rating.
In recent years, Bank of America has made similar purchases of financial heavyweights, scooping up names such as MBNA, FleetBoston, and most recently LaSalle Bank.
“We are aware of the issues within the housing and mortgage industries,” Lewis added.
“The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability.”
While the deal still faces some regulatory hurdles, most believe it will have no problem being approved, as a Countrywide failure would be much more detrimental for the broader economy.
Shares of Countrywide were down $1.03, or 13.29%, to $6.72 in early session trading on Wall Street.
Updates: The LA Times reported that Mozilo stands to get $110 million in severance from the B of A deal.
Analysts expect substantial layoffs and closures as part of the merger.
The Service Employees International Union (SEIU) has expressed caution regarding the proposed merger, releasing the following statement:
“With the deepening housing crisis and growing concerns about the unknown risks lurking on and off Bank of America’s balance sheet, we believe combining the largest bank with the largest mortgage lender will result in unnecessary and unacceptable long-term risk to the nation’s working families and consumers.”
“Permitting such concentration of risk would be like putting a sick patient, Bank of America, together in the same room with a highly contagious and terminally-ill patient, Countrywide, and expecting both of them to get better.”
See the full list of closed lenders, mortgage layoff and mergers.
Somewhat amazingly, Countrywide Financial Corp.’s savings bank was bringing in deposits at a pace of $50 million a day back in 2007 as the crisis was unfolding (thanks to super high, unsustainable yields for customers).
Shortly thereafter, they were scrambling for cash to keep their balance sheet intact. We all knew this would be the eventual outcome.