Countrywide Financial Corp. (CFC)

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Countrywide results in focus amid housing gloom
Fri Jan 25, 2008 10:24am EST

By Jonathan Stempel

NEW YORK, Jan 25 (Reuters) - Countrywide Financial Corp's fourth-quarter results, scheduled for release on Tuesday, will be closely scrutinized for what they show about the declining U.S. housing market, and what they mean for Bank of America Corp, which is buying the nation's largest mortgage lender.

Analysts view the $4 billion all-stock acquisition as a bold bet to save Countrywide (CFC) from mounting losses and write-downs as borrower defaults soared. Bank of America (BAC) Chief Executive Kenneth Lewis on Jan. 15 said his bank conducted "the mother of all due diligences" before the purchase.

It's rare that quarterly results of companies being acquired attract much attention. This one is different.

The purchase price valued Countrywide at $7.16 per share. While that's 84 percent below their peak last February, some analysts said it might still be too high.

They cite uncertainty about the duration and depth of the mortgage crisis, and the mushrooming lawsuits against the Calabasas, California-based lender and longtime Chief Executive Angelo Mozilo alleging aggressive, unfair or improper lending, or that they should be liable to stockholders who lost money as shares fell.

Since the merger was announced on Jan. 11, Countrywide shares have usually traded well below $7.16. That can be a sign that investors expect the merger to be renegotiated. Shares of companies being bought in all-stock transactions typically trade in lockstep with shares of their acquirers.

Analysts on average expect Countrywide to post a fourth-quarter loss of 10 cents per share, equal to roughly $58 million, Reuters Estimates said on Friday.

That would be better than the third-quarter loss of $1.2 billion, but well short of Mozilo's Oct. 26 forecast for profit of 25 cents to 75 cents per share.

Future results could benefit if the $150 billion federal economic stimulus package for the U.S. economy goes through. It includes a provision to increase for one year the size of home loans that Fannie Mae (FNM) and Freddie Mac (FRE) may buy. This could allow Countrywide, which now primarily makes such "conforming" loans, to offer larger loans to more borrowers.

In the merger agreement itself, Countrywide represented it didn't face major undisclosed litigation or liabilities.

Some attention has been focused on the agreement's "material adverse effect" or MAE clause, a common provision that can let a buyer back out or renegotiate if conditions worsen.

"The merger agreement generally appears highly conditional and contains several Countrywide representations that may increase uncertainty around closing," Lehman Brothers risk arbitrage analysts Evren Ergin, Amit Dholakia and Nathaniel Pollack wrote in a Jan. 18 report.

"The MAE carve-outs appear fairly weak and do not appear to include an explicit carve-out for industry effects, which we believe to be a significant omission," they continued. "However, the MAE definition does carve out the effects of 'general economic or market conditions' on other companies in the industries in which the parties operate."

Bank of America Chief Financial Officer Joe Price in a Jan 22 interview would not speculate on Countrywide's results. "We're envisioning they would be consistent with what we thought when we did our due diligence," he said. (Reporting by Jonathan Stempel; Editing by Dave Zimmerman)


http://www.reuters.com/article/fundsFundsNews/idUSN2531947220080125