Ellington Financial LLC EFC has entered into a definitive agreement to acquire Arlington Asset Investment Corp. AAIC in a stock-and-cash transaction. Closing of the deal, subject to AAIC’s shareholder approval and other customary conditions, is expected in fourth-quarter 2023. The transaction has been unanimously approved by both the companies’ boards of directors.
Ellington Financial is a real estate investment trust (“REIT”) investing in a diverse array of financial assets including residential and commercial mortgage loans. On the other hand, Arlington is a REIT that invests primarily in mortgage-related and other assets. The merger transaction is likely to provide an increased scale of operations and enhanced access to capital markets.
Terms of the Deal & Financial Impact
Per the terms of the agreement, each share of Arlington common stock will be converted into 0.3619 shares (subject to possible reduction based on an asset performance provision) of Ellington Financial common stock, or approximately 11.7 million shares of EFC’s common stock in aggregate.
Based on the closing stock price of both companies on May 26, the deal is valued at $4.77 per Arlington share. This indicates a 73% premium to Arlington's share price.
Also, EFC’s external manager is to contribute cash of $3 million in the aggregate (or $0.09 per share) to the common stockholders of Arlington.
Under the transaction, Ellington Financial is to assume Arlington's outstanding preferred equity, senior unsecured notes and trust preferred securities. Further, the combined company will operate under the name Ellington Financial Inc.
Post the merger, Ellington Financial stockholders are expected to own approximately 85% of the combined company's stock, while Arlington stockholders are expected to own approximately 15%.
The deal is anticipated to be accretive to Ellington Financial's earnings in 2023 and to its book value within one year of deal closure, with enhanced long-term growth potential.
AAIC’s investment portfolio aligns well with EFC's portfolio. Arlington’s relatively low leverage is likely to provide enhanced returns by deploying additional capital in Ellington Financial 's targeted assets classes.
The merger is expected to increase efficiencies in operating expense as fixed expenses would be spread over a larger equity base.
The transaction is likely to provide a desirable target capital structure with the addition of Arlington's unsecured debt and preferred equity having attractive costs of capital.
Post merger, Ellington Financial is expected to have a pro forma equity capital base of over $1.5 billion. Also, based on the closing price of EFC’s common stock on May 26, the estimated pro forma market capitalization of the combined company is expected to exceed $1.0 billion.
Laurence Penn, chief executive officer and president of Ellington Financial stated, "We are extremely excited about the opportunity to add a significant portfolio of assets – particularly low-coupon mortgage servicing rights – that align very well with our expertise and existing management platform."
He added, "We believe that the benefits of this acquisition include greater operating efficiencies, a larger market capitalization, and attractive long-term unsecured debt and preferred equity capital. Upon closing, we believe that we will be positioned well to drive accretive earnings growth and provide strategic and financial benefits to our stockholders."
Over the past six months, shares of EFC have lost 9.7% whereas shares of AAIC have gained 32.5%.
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Currently, EFC carries a Zacks Rank #4 (Sell), whereas AAIC carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Inorganic Expansion Efforts by Other Finance Stocks
Ready Capital Corporation RC completed the previously announced acquisition of Broadmark Realty Capital Inc, following shareholders’ approval of both companies. The merger is a strategic fit as it leads to the creation of a preeminent non-bank lender to the lower and middle commercial real estate market and the fourth-largest commercial mortgage REIT with a total equity capitalization of $2.8 billion.
Each share of Broadmark was converted into the right to receive 0.47233 RC shares, implying 63 million shares of Ready Capital common stock (as of Dec 31, 2022). When the deal was announced in February, Ready Capital stockholders were expected to own approximately 64% of the combined company’s stock, while Broadmark stockholders were anticipated to own the remaining 36%.
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