The Wall Street Journal-20080119-Doubts Over Deal Hit Countrywide Shares
Return to: The_Wall_Street_Journal-20080119
Countrywide Financial Corp. shares dropped nearly 10% Friday amid growing investor fears that Bank of America Corp. could walk away from its agreement to acquire the struggling home-mortgage lender.
Countrywide shares were at $4.96 in 4 p.m. composite trading on the New York Stock Exchange Friday, a 12-year low, down from $5.48 Thursday and $6.33 on Jan. 11, the day plans were announced for a merger in which shareholders would get 0.1822 Bank of America share for each share in the mortgage company. Based on Bank of America's closing of $35.97, the offer values Countrywide at about $3.8 billion, or $6.55 a share.
Countrywide's closing price was about 24% below the offer price. On the day the deal was announced, the gap was about 10%.
Bank of America declined to comment. Countrywide representatives didn't respond to requests for comment.
Stocks in takeover deals regularly trade below the offer price because of the risks that plans could fall through. The gap, known as the arbitrage spread, is wider than usual in this case, though.
"The Street thinks the deal will have to be re-priced" lower, said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey & Co. He has argued since the deal was announced that there is a high risk the price will be renegotiated if the mortgage market continues to worsen and Countrywide losses exceed Bank of America's expectations. The purchase is due to be completed in the third quarter.
Some Wall Street analysts attributed the wide gap to details of the merger agreement that Countrywide filed with the Securities and Exchange Commission late Thursday. The agreement gives Bank of America wide leeway to walk away. One condition is that Countrywide must get an unqualified opinion on its 2007 annual report from an outside auditor. Bank of America wouldn't be held to a "specific performance" clause, which generally refers to the ability of the seller to force the buyer to complete a buyout. Countrywide also agreed to a broadly worded clause on "material adverse changes" that could torpedo the deal.
Frederick Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco, said arbitrage traders "had a tough year in 2007 and are reluctant to put on the trade where there is perceived risk."
Despite those risks, he said, he expects the transaction to be completed on the current terms.
Some planned buyouts of mortgage lenders fell apart last year. H&R Block Inc. last April announced plans to sell its Option One Mortgage unit to Cerberus Capital Management LP, but the business continued to deteriorate, and the two companies called off the deal in December.
