Countrywide shares fall as analysts question deal price
NEW YORK—Shares of Countrywide Financial Corp. tumbled Monday as two analysts said Bank of America Corp.'s planned acquisition for the mortgage lender could be renegotiated to a lower price.
Countrywide shares fell 62 cents, or 10.4 percent, to $5.36 Monday. During the past year, shares have traded between $3.95 and $42.24.
Friedman, Billings, Ramsey & Co. analyst Paul Miller said in a research note Bank of America should walk away from its acquisition of Countrywide, or at very least reduce the purchase price, because of continued deterioration in the mortgage market. Miller pegged a new sale price at between $0 and $2 per share. He set his price target for Countrywide at $2.
In January, Bank of America agreed to acquire Countrywide for about $4 billion in an all-stock deal. The deal is supposed to close during the third quarter. Based on Bank of America's Friday closing price of $39.79, the deal values Countrywide shares at about $7.25.
S&P Equity Research analyst Kevin Cole said the deal is likely to be completed, but at a reduced price because of credit losses at Countrywide. Cole maintained a $6 price target for Countrywide, which assumes about a 17 percent discount based on Bank of America's Friday closing price.
FBR's Miller said if Bank of America is to complete the deal, it will likely have to reduce the value of Countrywide's mortgage investments between $20 billion and $30 billion. That write-down of assets could force Bank of America to raise new capital to maintain strong cash reserves.
The current estimate of write-downs is likely larger than was planned for in the initial deal as pricing for investments Countrywide holds have continued to weaken since January, Miller wrote in the note.
Miller said if write-downs exceed $22 billion, Bank of America will likely need to renegotiate the price of the deal. If write-downs fall below that level, Bank of America is likely to be able to offset the adjustments, Miller wrote in the note.
On Thursday, Bank of America left open the possibility it might not assume outstanding debt issued by Countrywide, leading S&P's ratings agency to cut Countrywide to junk status. Miller said leaving that possibility open could be the first step in renegotiating the sale price.
Fitch Ratings said earlier Monday it placed Countrywide on an "Evolving" watch -- meaning it could be upgraded or downgraded soon.
Shares of Bank of America fell 82 cents to $38.97.
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