You can bank on it. Every time there’s a big bank or thrift takeover, eyes turn to Newport Beach-based Downey Financial Corp.
Downey’s shares jumped 6% on May 8, the day Wachovia Corp. said it’s buying Oakland’s Golden West Financial Corp. for $25 billion. They’ve since pulled back with a market value of $1.9 billion last week.
Speculation about Downey has come and gone before. The key obstacle to a sale: cofounder and Chairman Maurice L. McAlister, who controls 20% of the company and has shown no interest in selling.
What’s interesting this time around are parallels to Downey and Golden State, which runs savings and loan World Savings.
Few thought Golden State co-chief executives Herbert Sandler and Marion Sandler would sell their company after building it into the nation’s second largest thrift after Washington Mutual Inc. The couple own about 10% of Golden State and have dominated the company much like McAlister has.
And, like McAlister, the Sandlers are getting on in age. They’re in their mid-70s. McAlister is said to be a healthy 81.
Thomas Prince, Downey’s chief financial officer, declined to comment on the latest speculation about Downey spurred by Golden West and offered up the company’s usual response.
“We don’t comment on anything of that nature,” he said. “If we have something to announce, then we will announce it.”
The odds of a Downey sale may be long. But the thrift is “more in play now than a few weeks ago,” said analyst Paul Miller of Friedman, Billings, Ramsey Group Inc.
“Downey has to be taking a good hard look at their business,” he said. “They’d never tell you that. But at some point they have to sell.”
Friedman, Billings, Ramsey Group owns about 1% of Downey’s 28 million shares.
The thrift will face succession issues, according to Miller. But that could “still be a couple of years away,” he said.
Chief Executive Daniel Rosenthal, McAlister’s former son-in-law, came back to the thrift to run things in late 2004. Rosenthal, 53, had been chief executive from 1998 to early 2004, when he stepped aside for the short-lived term of Marangal “Marito” Domingo.
McAlister’s daughter, Cheryl Olson, is Downey’s vice chairman.
Based on Wachovia’s bid for Golden West, Miller estimates Downey could fetch $2.6 billion, 35% higher than its market value last week.
McAlister’s Stake
McAlister would see a big payout in a sale. His 20% stake is worth about $380 million. His retirement contract calls for him to keep getting his $500,000 yearly salary,or a lump sum payment,if the thrift is sold.
Orange County has seen two big deals this year.
In March, Wachovia wrapped up its $3.9 billion buy of Irvine-based bank holding company Westcorp Inc. and its auto loan offshoot WFS Financial Inc.
In April, Washington Mutual Inc. agreed to buy Irvine-based Commercial Capital Bancorp Inc. for nearly $1 billion. Commercial Capital, which has $5.5 billion in assets, is one of the largest apartment lenders in California.
Pasadena-based IndyMac Bancorp Inc., which has its mortgage arm in Irvine, and Washington Mutual itself also are mentioned as possible takeover targets.
Possible suitors for thrifts include megabanks JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp.
Then there’s another contingent.
Investment banks are interested in buying thrifts and others who make home loans to boost their business selling mortgages packaged as bonds.
Earlier this month, Deutsche Bank AG said it is buying Lake Forest-based mortgage company Chapel Funding LLC. Executives at Morgan Stanley and Merrill Lynch & Co. said they’re looking to buy a mortgage lender.
“They (investment bankers) could do something with a mortgage company,” said James F. Mitchell, an analyst with Buckingham Research Group Inc. in New York. “The stock valuations are coming down. If you’re a buyer, it’s not a bad time to buy.”
That’s the case for Downey. The company’s shares are off about 12% from their highs of last summer on concerns about a slowdown in mortgages and the risk of some loans going bad.
In the first quarter, two of Downey’s top five holders (besides McAlister) sold 8.5% of the company’s outstanding stock, according to filings with the Securities and Exchange Commission.
Goldman Sachs Asset Management LP sold off nearly half of its holdings during the period, leaving it with 976,356 shares, or 3.5%.
Philadelphia-based investment firm Aronson, Johnson & Ortiz LP sold nearly 1.5 million shares, leaving it with 40,000 shares, or less than 1%.
Worries about loans didn’t deter Wachovia. Nearly all of Golden West’s loans have adjustable rates. Many give borrowers different payment options, including credit card-style minimum payments. Loan interest beyond a minimum payment gets tacked onto the loan, causing them to negatively amortize.
As of March 31, 92% of Downey’s home loans were option ARMs, up from up 88% in September.
The number of Downey’s loans subject to negative amortization is less than the 3% peak of five years ago, according to financial chief Prince.
“We obviously monitor it all of the time,” he said.
