The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, March 31 (Reuters Breakingviews) - Spring is the start of the home-buying season. The same apparently goes for Rocket Companies’ RKT.N dealmaking schedule. The home lending-focused financial technology conglomerate started by Detroit’s Dan Gilbert agreed to buy mortgage servicer Mr. Cooper COOP.O for $9.4 billion in an all-stock transaction. It is Rocket’s second purchase in a month as it aims to build a one-stop shop for house hunters. That makes some sense, but the binge squeezes existing investors.
On Monday, Rocket offered Mr. Cooper shareholders the equivalent of $143.33 per share, a 37% premium to the seller’s unaffected stock price and leaving its investors owning a quarter of the newly combined company. This comes on the heels of Rocket’s transaction earlier in March to buy digital real estate listing platform Redfin RDFN.O for $1.8 billion, again in stock.
Putting Mr. Cooper under Rocket’s roof keeps borrowers on the hook for longer, maintaining a relationship as they eventually look to refinance, tap their houses for equity or service a loan for their next purchase.
Rocket said it will be able to squeeze a chunky $400 million in cost savings from Mr. Cooper. Taxed at the target’s effective rate and capitalized, the synergies represent nearly $3 billion in net present value, covering the premium of $2.5 billion. Yet Rocket’s shareholders get only 75% ownership of that sum, leaving them short. The deal assumes that Rocket can achieve an additional $100 million in profit bumps from revenue synergies, or opportunities to clinch sales that the companies couldn’t separately, often a much trickier proposition. Without that benefit, the math doesn’t quite stack up. Rocket’s assumed profit boosts from the Redfin tie-up also looked aggressive.
The buyer’s shares promptly fell 9% on Monday, a similarly sour reaction to the 15% tumble on announcing the purchase of Redfin. It makes sense: Rocket is a controlled company, leaving independent shareholders no say as they get diluted by the issuance of stock equivalent to a massive 40% of its shares outstanding for both transactions. Gilbert’s home renovations leave less and less room for existing lodgers.
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CONTEXT NEWS
Rocket Companies, a conglomerate including lender Rocket Mortgage as well as various other assets like home search platform Rocket Homes, said on March 31 it has agreed to buy Mr. Cooper Group for $9.4 billion in an all-stock deal.
The exchange ratio values Mr. Cooper, a mortgage servicing company, at $143.33 per share, a 37% premium to Mr. Cooper’s undisturbed price on March 28.
Rocket also agreed to buy real estate brokerage Redfin in an all-stock deal for $1.8 billion on March 10.
JPMorgan is acting as Rocket’s financial advisor and Paul Weiss is its legal counsel.
Rocket's shares descend back to earth https://reut.rs/43zN0Zw
(Editing by Jonathan Guilford and Maya Nandhini)
((For previous columns by the author, Reuters customers can click on SABA/jennifer.saba@thomsonreuters.com))
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