TWO rejects UWM offer, but analyst says this isn't the end

The Two Harbors Investment board's rejection of the updated $12 per share offer from UWM Holdings will not be the coda on this hostile take-over battle, Keefe, Bruyette & Woods analyst Bose George stated.

"While TWO shares are likely to be weak, it's not clear that this is the last word on the sale of TWO," his latest commentary on the deal said.

In a press release, Two Harbors said it rejected the proposal for several reasons, including claiming, in spite of UWM's assertions, the funding it has for the deal, the Mizuho Bank facility, is not committed financing. The line is subject to lender due diligence and permits Mizuho "in its sole and absolute discretion" the right not to fund the deal, therefore making it conditional and not committed.

The role of Fitch downgrades in the rejection

The rejection also pointed to two downgrades by Fitch Ratings for UWM's outlook because of an average capital drain of approximately $535 million over the past three years.

In December, Fitch dropped UWM's outlook to stable from positive due to increased gross and corporate leverage as compared to 2024, "as borrowings have increased to fund originations and operations and tangible equity has declined with dividends in excess of earnings," it said at the time.

Now, on April 13, the outlook was revised to negative, with rising corporate leverage exceeding Fitch's downgrade trigger.

"Borrowings have grown in recent periods to fund originations and operations and have increased with greater retention of mortgage servicing rights in favor of sales," Fitch's report on the downgrade said.

"Meanwhile, tangible equity has declined as quarterly dividends frequently exceed earnings. Fitch expects these trends to continue in the near term."

It threatened to reduce the senior unsecured debt rating to B+ from BB- if UWM does not show "meaningful progress" towards reducing its corporate leverage.

The statement reiterated Two Harbor's support for the $11.30 per share cash bid from CrossCountry, which if consummated, would take it private.

Two Harbors also claimed that UWM's $402 million of cash on hand as of March 31 was not inclusive of a $170 million dividend paid on April 9.

"The fact that UWMC did not update its cash balance in either its April 20 or April 30, 2026 proposals suggests that its current cash on hand may be below what UWMC has told TWO stockholders," the press release said. "Compounding these concerns, the Revised Proposal omits customary interim operating covenants, leaving UWMC unrestricted in its ability to issue equity and declare further capital-draining dividends prior to closing."

UWM's attacks on Two Harbors

Two Harbors then called out UWM's statement describing its business as "a melting ice cube" and a combination would have no operational efficiencies or synergies. But originally, UWM said it would get approximately $250 million in annual synergies from the deal.

It also pointed to UWM's original statements that a cash transaction would not make sense because it would not increase the public float, one of the stated reasons for the transaction.

It was one of several factors that raise questions about the Detroit-based company's credibility, Two Harbors said.

The rejection referenced UWM's April 30 closing price of $3.54 per share. The UWM offer was made public after the stock market trading day ended.

On May 1, UWM's stock opened at $3.50 but ended at $3.66 per share. The Two Harbors' letter was released before the market opened on May 4, and UWM opened at $3.64 per share.

Two Harbors ended April 30 at $11.57 per share. Its opening and closing prices on May 1 were $12.29 and $12.54 respectively.

However, on Monday morning, it opened at $12.15 per share.

How many TWO shareholders would take the stock deal

Two Harbors claimed that between 25% and 30% of its stockholders would end up with the default option of the original 2.3328 shares of UWM common stock per its own share offer which remains on the table. Two Harbors said this option is only worth $8.54 per share, not the headline $12 per share.

George added that Two Harbors' shareholders will receive a 34-cent-per-share dividend as the real estate investment trust has been saying it would keep paying those until the deal closed.

Previously UWM said it is keeping the stock deal as an option for those who want to share in its company's upside.

Who has better long-term prospects?

In his May 4 Institutional Risk Analysis, R. Christopher Whalen of Whalen Global Advisors wrote Two Harbors shareholders should pick the highest cash offer available.

However, he likes CrossCountry's longer term prospects better "because of the lower leverage and more rational business model.

"Like some other large lenders, UWMC has been waiting for lower mortgage interest rates to drive up lending volumes and essentially dig their way out of a hole," Whalen said. "But rates may rise from here."

Whalen pointed to his past comments regarding debt at UWM adding "When a non-bank lender has a lot more unsecured debt than MSR, that's bad."

Furthermore, when a nonbank has to sell servicing rights at a discount to the cost of creating them "because your bid for loans in the wholesale channel is totally excessive," in order to offset operating losses, this is worse in his book and not a viable long-term business model.

UWM's response to Two Harbors

UWM is "assessing its options" so the Two Harbors stockholders "obtain the value they deserve," it said in a press release. The Two Harbors interpretation of its offer doesn't reflect the underlying math, using "illogical arguments to suggest otherwise, preventing TWO stockholders from even the opportunity to receive significantly higher value."

UWM pointed out this same board already recommended a transaction with UWM. Addressing Two Harbors' argument regarding deal financing. UWM said the Mizuho facility has no ratings trigger, no borrowing-base test and no market contingency. Furthermore, Mizuho has agreed to remove what UWM called the customary due diligence condition which Two Harbors raised in its statement.

"This is more than can be said for CrossCountry's financing, which still contains scant details even in the most recent announcement and the Board deliberately fails to provide any details about it for obvious reasons," the UWM press release said.

UWM again called on Two Harbors shareholders to demand the board "engage fairly and openly" with it and until then "carefully consider" how they will vote on the CrossCountry transaction.

UWM is reporting earnings on Wednesday, and will be holding an investor day on May 14.