Dealwatch: Countrywide Financial

[Omaha Steve]

http://www.thedeal.com/dealscape/2008/01/dealwatch_countrywide_financia.php

Bank of America Corp. said Jan. 11 it would acquire Countrywide Financial Corp. in an all-stock deal worth $4 billion, capping a week of rampant speculation the country's largest mortgage lender was headed for bankruptcy or a bailout.

Countrywide insisted Jan. 8 it wasn't headed for Chapter 11, a rumor that sent its stock down precipitously. Indeed, as analysts said Jan. 9, Countrywide may be too big for bankruptcy or in the interest of lawmakers to be kept afloat or merged. Media reports then indicated Jan. 10 BofA, which pumped $2 billion into Countrywide in August, was in talks to buy the lender. A statement in its own defense earlier in the week, as The Deal's Peter Moreira pointed out, offered "the latest twist in the story of the company's subprime problems, the largest U.S. mortgage lender reassured the market that it actually saw an improvement in its business in December over the previous month." The company, however, has also unveiled its foreclosure and late-payment rates rose steeply in December.

As concern continued Jan. 9, Countrywide shares continued their free fall. They have tumbled from above $45 apiece in January 2007 to below $5 per share on the afternoon of Jan. 9. Moreira wrote that the selloff was triggered by a report indicating court records show Countrywide fabricated documents related to a borrower's Pennsylvania bankruptcy case, but the company issued a statement denying a bankruptcy filing was imminent. Countrywide said it posted better-than-expected fourth-quarter fundings and a gain in December over November, but the company has also revealed the foreclosure rate for its mortgages doubled to 1.44% from .7% a year earlier. Late payment rates rose to 7.2% from 4.6%.

Moreira wrote:

Like all mortgage lenders, Countrywide has been caught in the severe downturn in the mortgage market, brought on by heavy defaults in the subprime market.

Investors thought the company's problems were over in August when Bank of America Corp. bought $2 billion in convertible preferred shares, shoring up the company's balance sheet.

At the time it looked like a sweet deal for Charlotte, N.C.-based Bank of America, because the preferred stock yields 7.25% and could be converted to common stock at $18 a share — a 17.5% discount at the time. Based on Wednesday's price, the stock would have to almost quadruple for Bank of America to convert its holding at a profit.

Back in October 2007, The Deal's Ron Orol cautioned that if labor union American Federation of State, County, and Municipal Employees could have the same influence over Countrywide as it did over Home Depot Inc., its chief executive Angelo Mozilo could be forced out, especially if a serious activist hedge fund were to join the cause.

AFSCME director Richard Ferlauto launched two consecutive "just vote no" campaigns against Home Depot chief executive Robert Nardelli in 2005 and 2006. ... About 32% of participating investors voted against Nardelli in 2006 and 5% supported AFSCME's campaign in 2005.

As Orol explained, Nardelli's shareholder disenfranchisement led activist Ralph Whitworth to take interest in Home Depot, and the CEO ultimately steeped down. As far as Countrywide goes, the Calabasas, Calif., company reported a $1.2 billion loss for its third quarter, drawing fire from Ferlauto, who has described Mozilo as "credibility challenged," and called for the mortgage company to find new leadership.

FULL STORY AT LINK.