MGIC scraps Radian deal amid mortgage turmoil
NEW YORK (Reuters) - Mortgage insurer MGIC Investment Corp (MTG.N) scrapped plans on Wednesday to acquire rival Radian Group Inc (RDN.N), as the takeover became the latest casualty of turmoil in U.S. mortgage markets.
MGIC, the largest private U.S. mortgage insurer, agreed in February to buy Radian in a $5.47 billion stock deal, creating a company that would have controlled a third of the market. Since then, the shares of both companies have lost more than half their value amid a downturn in mortgage and housing markets that boosted losses in the loans and bonds they insure.
As a result, MGIC said the merger no longer made sense.
"Market conditions changed since that point in time," MGIC Chief Executive Curt Culver said in an interview.
Radian CEO Sanford Ibrahim said in a conference call there was much uncertainty around the merger. The companies concluded "it was in their best interests to remain independent."
MGIC had been counting on the sale of C-BASS, a subprime mortgage investment vehicle jointly owned with Radian, and an offering of hybrid debt to fund a significant stock buyback.
"Those options are not available today and they played a big roll in this merger being accretive. That's why this deal went away from us," Culver said.
The break-up comes two weeks after MGIC filed a lawsuit to force Radian to divulge information about businesses that were vulnerable to the credit crunch. Radian countered that MGIC was obligated to complete its deal.
A week before that, the companies had revealed that their $1.03 billion investment in C-BASS could be worthless, after defaults and margin calls mounted.
Radian told analysts a C-BASS sale "remains a possibility," although Culver said there are no bidders and the business would most likely be sold back to management. Most of the investment would be written off.
In connection with the end of the merger deal, litigation between the two parties was dropped and no payments were exchanged.
MORE CASUALTIES
The MGIC-Radian deal is the latest victim of a mortgage crisis that expanded into a credit squeeze that has rattled financial markets and threatens to scuttle dozens of pending mergers and buyouts.
Retailer Home Depot Inc (HD.N) slashed the price of its supply unit to preserve a deal with buyout firms. Deals involving student lender SLM Corp (SLM.N), known as Sallie Mae, and payments processor First Data Corp FDC.N are under scrutiny as bankers wrestle with loan commitments.
Still, MGIC and Radian insist the credit crunch, while hurting in the short-term, will help them expand.
Radian shares were up 5 percent after Radian officials, in the conference call, gave detailed information about expected losses and projected strong book value growth.
Losses from subprime and other mortgages would be rising, but "manageable" and the company would focus efforts on navigating through the current turmoil, Ibrahim said.
Radian stock had plunged as much as 13 percent before the conference call. In late afternoon trading, MGIC shares had risen 38 cents, or 1.2 percent, to $30.72.
Radian anticipates a 4.7 percent loss rate on subprime mortgages it insures through 2010, or $623 million, a pace well below industry averages. After taking a hit from credit losses this year, book value is expected to rise to $59.96 a share by 2010 from $46.90 now, the company says.
"We believe the mortgage insurance business more than any other is positioned to benefit from the crunch," Ibrahim said. "The overall decline in risk appetite will lead to more mortgage insurance penetration."
Mortgage insurance policies, which are purchased by lenders, are also expected to be kept in place longer.
Radian also said it is selling about half its 41 percent stake in Sherman Financial Group, a venture that invests in distressed consumer debt, for about $260 million. The company added that it drew down $200 million from a $400 million bank line.
That said, both companies warned that conditions would remain challenging in the near term after years of reckless lending. The C-BASS write-down and credit losses would hurt third quarter results, the companies said.
"It's going to be difficult for the next two years. We won't see improvement on losses until 2010," Culver added.
(Additional reporting by Dan Wilchins and Mark McSherry)
