So Bank of America has come to the rescue of the moribund Countrywide, taking over the company in a $4bn all-stock transaction pitched at a discount to Thursday’s close.
Countrywide shares slumped on Thursday on whispers that the company was on the verge of bankruptcy before soaring more than 50 per cent as talk of a deal with BoA leaked.
The deal was struck at 0.1822 BoA shares for each Countrywide share or about $7.16, below the $7.75 close, and follows a $2bn investment by Bank of America back in August, which saw it buy preferred shares, convertible into 16 per cent of the ordinary equity at $18.
And that, at the time, was seen as BoA buying in at an attractive price to a company which had its back against the wall. It was also seen as a vote of confidence in financial stocks.
Ha. Countrywide has since fallen another 75-odd per cent.
Is the latest buy, wondered Deal Journal, a case of throwing good money after bad? If the company did go bust it could take the entire BoA investment with it. And for Countrywide to sell out at this price suggests that the bankruptcy fears were not unfounded. Dealbreaker argues this is all about lowering the cost of funding by getting on board BoA’s mammoth balance sheet. Others are crying bailout with political string pulling.
Bank of America has always wanted a larger presence in mortgage banking and Ken Lewis has also said that they would wait to buy until blood is running in the streets,” Charles Peabody, an analyst at Portales Partners in New York, told The New York Times. “Mozilo must have thought there was a chance Countrywide wouldn’t survive.
Bank of America have long been interested in Countrywide. They were sniffing around the company back when the shares were above $40. But it has now become the US’s largest mortgage lender for what looks like a bargain price against the $30bn it would have cost before the rot set in.
BoA knew back in August that Countrywide’s woes were far from over. And the minority stake brought with a pole position to take the house should the worst come to pass.
Even if there’s a few writedowns along the way, points out Felix Salmon:
[Ken Lewis] was faced with an opportunity to buy Countrywide for little more than a rounding error in the BofA balance sheet: if he let it slip away from him now, he’d never forgive himself.
