January 11, 2008

BofA conference call on Countrywide Buyout

I have listened to the conference call this morning at 8:30 regarding the buyout and here is my initial thoughts:
  • Price tag is .1822 shares of BofA to the equivalent of $7 per share of Countrywide (CFC), or a deal of Price to book of .29 x. That is a hell of a discount for the company.
  • The deal will make BofA a leader in consumer finance and banking in every single category you can imagine in the US.
  • An additional 1,000 branches added to BofA already large network of 5,800. No other US bank is even close to that figure.
  • Cost savings of $670 million due to synergies is expected to be fully realized in 2011. A perpetual discounted value of these savings to BofA now, assuming BofA cost of capital of 9%, amounts to $6.4 Billion. BofA cost of the deal is just over $7 Billion ( $2 billion initial investment plus $4 billion for the buyout plus $1.2 billion charge).
  • CFC problem is a liquidity issue rather than a business model issues, which BofA can fix with its balance sheet strength.
  • Default cost and litigation expenses is reflected in the huge discount that BofA negotiated. BofA did not stipulate any legal structure to shield it from any litigation. The cost savings alone cover the cost of buying CFC and any additional revenue growth is pure value added to the market cap of BofA.
  • These are the times to make an acquisition to advance any banks operation ahead of its competition. You always buy when the news is bad.
  • The risk obviously is the litigation and write down losses exceeds what is factored into the price.
  • It does not seem that CFC CEO will continue after the closing of the deal. BofA CEO said "... he will go and have some fun..."

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