Countrywide rescue: $4 billion
In a widely expected move, Bank of America steps in to buy one of the lenders hardest hit by the mortgage crisis.
NEW YORK (CNNMoney.com) -- Bank of America came to the rescue of embattled mortgage lender Countrywide Financial Corp. Friday, announcing it would buy the company for $4 billion in an all-stock deal.
Countrywide (CFC, Fortune 500) shares tumbled 15 percent in afternoon trading on the New York Stock Exchange a day after soaring 51 percent on speculation that the deal was forthcoming. Bank of America (BAC, Fortune 500) stock edged lower.
Countrywide Chairman and CEO Angelo Mozilo said the sale to Bank of America was the right move as his company has endured ongoing fallout from the housing slump.
"We believe this is the right decision for our shareholders, customers and employees," Mozilo said in a statement.
The deal would extend Bank of America's reach in the mortgage business by making it the nation's largest lender.
Bank of America Chairman and CEO Kenneth Lewis suggested he was aware of the troubles that his firm was taking on, but said acquiring Countrywide was a "rare opportunity" for his company.
"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," Lewis said in a statement.
Under the terms of the deal, shareholders of the Calabasas, Calif.-based Countrywide would receive 0.1822 of a share of Bank of America stock in exchange for each share of Countrywide. Based on Thursday's closing prices, the deal values Countrywide at $4 billion, or $7.16 a share, a 7.6 percent discount to where the stock closed.
"The size of the discount BofA was able to negotiate indicates how difficult this situation is," said Christopher Brendler, managing director at Stifel Nicolaus & Co. "The discount indicates we're not out of the woods yet, with more problems still to come."
Bank of America said it expected to generate $670 million in after-tax savings as a result and that the deal would not negatively impact its earnings in 2008.
As part of the deal, Bank of America will absorb Countrywide's massive, albeit troubled loan portfolio. Last year, Countrywide had $408 billion in mortgage originations in 2007 and serviced about 9 million loans worth $1.5 trillion.
The two companies said that they would work toward keeping troubled borrowers in their homes, but said they did not plan to re-enter the subprime loan business.
Countrywide essentially shut down its subprime lending operations last year to focus on originating loans that conform to Fannie Mae and Freddie Mac guidelines, considered to be safe investments.
The proposed buyout, however, still faces approval from the boards of both companies, as well as federal regulators.
But analysts suspect the deal is unlikely to face any headwind from Washington since the Federal Deposit Insurance Corporation, the government agency that guarantees consumer deposits, would likely have to order a bailout of Countrywide if the situation at the company worsened.
"If this deal occurs, I believe it will have been shepherded by the bank regulators," said Punk, Ziegel & Co. analyst Richard Bove wrote in a research note Friday.
During a conference call Friday morning, Lewis and Bank of America Chief Financial Officer Joe Price gave little insight as to whether more buyouts were likely as a result of the buyout. Last year, Countrywide cut 12,000 as a result of its mortgage-related woes.
They added, however, that they expected many senior executives at Countrywide would likely remain at Bank of America.
Lewis said he hoped that Countrywide's Mozilo, who co-founded the firm nearly 40 years ago, would stay until the buyout was completed. Lewis said he would talk with Mozilo next week to see what his intentions were after that.
The two companies first paired up late last summer after Bank of America agreed to provide $2 billion in financing to Countrywide in exchange for a 16 percent stake in the company.
At the time, Countrywide had been trying to cope with a worsening housing market and rising delinquencies and defaults, especially among subprime mortgages given to customers with poor credit history. It had also been dealt a blow by the credit crunch, which had dried up pools of funding.
Last October, Countrywide announced its first quarterly loss in 25 years, recording a $1.2 billion loss during the third quarter.
Executives said the loss represented the worst of the company's problems but predicted a quick return to profitability in 2008, saying it had made necessary changes to market environment.
But the following months only proved more challenging for Countrywide. Countrywide reported rising delinquencies and foreclosures within its loan portfolio in December, and had to deny rumors it was close to bankruptcy.
Talk of Bank of America buying the mortgage lender outright escalated earlier this week amid growing speculation that Countrywide was on the verge of collapse.
Last year, Countrywide shares fell nearly 79 percent, making it the second worst performer in the S&P 500, a stock-market index consisting of some of the largest U.S. companies.