The Wall Street Journal-20080213-Legg Mason Unit Increases Countrywide Stake to 14-9-

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Legg Mason Unit Increases Countrywide Stake to 14.9%

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Legg Mason Inc.'s Capital Management unit said it has increased its stake in Countrywide Financial Corp., signaling confidence that Bank of America Corp. will proceed with its planned purchase of the ailing mortgage lender or that Countrywide will recover on its own.

The Baltimore-based fund manager disclosed it has raised its stake in Countrywide to 14.9% of the shares outstanding, currently valued at about $590 million, from 11.8% at the end of December. Legg Mason said it may buy more shares if Countrywide removes poison-pill provisions that deter unsolicited purchase of more than 15% of the company.

Bank of America announced a month ago a plan to acquire Countrywide in an exchange of shares valued at about $4 billion. That was more than 80% below Countrywide's year-earlier market value, reflecting investor fears over the high and unpredictable costs the company faces from rising defaults, falling home prices, lawsuits filed by customers and shareholders, and investigations by various regulators.

By acquiring more shares, Legg Mason took advantage of what it saw as an arbitrage opportunity, a spokeswoman said, though she declined to specify the prices paid by her company. At times in recent weeks Countrywide shares have traded more than 20% below the value of the Bank of America offer, reflecting concerns that the Charlotte, N.C., banking giant might decide to walk away from the deal.

Yesterday, Countrywide shares closed at $6.90, up 3.8%. That was about 12% below the current $7.80 value of Bank of America's offer to exchange 0.1822 of a share in that bank for every share in Countrywide.

Bill Miller, manager of the Legg Mason Value Trust mutual fund, wrote in a letter to fund investors that he was surprised Countrywide's board accepted "a bid that amounts to only 30% of book value" and is less than three times consensus earnings forecasts for 2009. He also said recent interest-rate cuts by the Federal Reserve should help mortgage lenders.

Mr. Miller said Legg Mason hasn't decided whether to vote in favor of the planned merger, due for completion in this year's third quarter. "We will vote against it if we believe greater value can be achieved by having [Countrywide] remain independent," he wrote.

A Bank of America spokesman said: "The transaction price was negotiated, and we believe it was fair for both companies."

Countrywide representatives didn't respond to requests for comment.

Legg Mason's Mr. Miller said Countrywide's board effectively has negotiated a "put option" to sell the company to Bank of America, but investors may decide not to do so if the mortgage market starts to perk up.