MGIC, Radian Deal Collapses amid Market Turmoil

The proposed merger of MGIC Investment Corp. here and Radian Group Inc., Philadelphia, has hit a serious snag as a result of the writedown in the value of C-BASS, a joint venture the two firms own a majority stake in.

Last month, the two companies mutually announced that the proposed merger is off. No money changed hands between the parties and the companies said they would drop all litigation related to the matter.

When the deal between the two mortgage insurers was first announced, they said they would need to sell a portion of the combined stakes in C-BASS and a second joint venture, Sherman.

But the trouble in the mortgage market forced both MGIC and Radian to say they would have to take an impairment against possibly their entire investment in C-BASS.

On Aug. 7, MGIC made its first public statement, which indicated the deal was in trouble. It said it informed the New York State Insurance Department that it was not obligated to complete the proposed merger with Radian because of the impairments both companies will take in regards to C-BASS. The decision was a result of a preliminary assessment conducted by MGIC's management.

The MGIC statement added that its management is "reviewing other developments that might affect MGIC's obligation to close. Whether MGIC will definitively conclude that it is not obligated to close the merger is a decision that will be made only by the board of directors of MGIC, which will not be asked to decide until MGIC's management has completed its analysis."

Radian, on the other hand, said it believes MGIC will have to live up to the merger agreement. It noted both firms own a 46% stake in C-BASS.

"Radian is not aware of any developments that would impact MGIC's obligation to close the merger. Importantly, Radian has fully complied with all of its obligations under the merger agreement," it said in its statement.

A pair of reports, one from Friedman Billings Ramsey, Arlington, Va., and the other from Fitch Ratings, New York, both indicated that Radian needed this transaction to be completed more than MGIC did.

"Given Radian's weaker position relative to its credit ratings, we believe that Radian needs the merger much more than MGIC," said the FBR report by Steve Stelmach and Paul Miller.

"Also, the deal is not without its merits for MGIC either, namely the added breadth of product offerings at Radian and the cost saves available if the deal goes through. As a result, we believe the transaction will ultimately pan out, but at a renegotiated valuation for Radian shares."

Out of the three scenarios they proposed, renegotiation of the deal's terms was the most likely outcome. The report gave three reasons.

The first was because regulators want to have a stronger mortgage insurance industry and "consolidation of Radian would meet that goal."

The next was that there were still synergies and cost savings available from the transaction.

The final reason was that because Radian needed the deal more than MGIC does, the former is open to a renegotiation rather than see it terminated.

In the report, FBR estimates that if the deal gets renegotiated, Radian shareholders will get 0.7788 shares of MGIC stock for each share they hold, instead of 0.9658 shares.

To get that number, the analysts used the initial exchange ratio divided by the current valuation differential between MGIC and Radian.

The FBR report addresses two other scenarios, which are the deal falls apart or there are no changes in any terms. That last instance is the least likely to happen, FBR said.

If the deal does get cancelled, the FBR report notes that Standard & Poor's put Radian on a negative watch and could be subject to a two-notch downgrade.

Fitch said in its report, "The probability of the merger between the two companies being consummated is now lower than previously expected."

Back on July 31, when both companies admitted they would have to take an impairment on C-BASS, Fitch put Radian on Rating Watch Negative. That move it said reflected Radian's "relatively weakened standalone financial position as a result of C-BASS."

Fitch added if the merger doesn't get completed, Radian's ratings would be downgraded by one notch. MGIC's announcements have increased the likelihood of that happening. On the other hand, Fitch said MGIC is still in "a good position to operate at its current rating level, either combined with Radian or as a standalone company."

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