Fairholme Capital Management LLC, a Miami-based equity fund
manager, has recently declared its intention to acquire the
insurance businesses of
). The move forms part of the company's plan to expand its
business in the insurance sector. The deal will come in exchange
of equities worth $52 billion to be issued by the fund manager.
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Underlying the proposed plan, Fairholme Capital Management will
exchange Fannie Mae and Freddie Mac preferred stock worth $34.6
billion. Additionally, the company will raise a sum of $17.3
billion from preferred stockholders and rights offerings.
We believe that apart from generating inorganic growth, the
acquisition will have other benefits for Fairholme Capital
Management as well. It is worth noting that Freddie Mac and
Fannie Mae were troubled mortgage lenders that were bailed out by
the government during the financial crisis and preferred stock
worth $34.6 billion was floated in the market for the recovery.
Fairholme Capital Management is the largest holder of these
preferred shares. However, the future of these shares seems
uncertain as the government plans to liquidate Freddie Mac and
Fannie Mae in the near future. Both Freddie Mac and Fannie Mae's
performances have improved after the financial crisis and
therefore the preferred stock buybacks would actually result in
lower profits for Fairholme Capital Management.
Hence, to prevent this, Fairholme Capital Management has proposed
the aforementioned recapitalization program of converting the
preferred stock into equities. This will be similar to the
government's planned liquidation program for Freddie Mac and
Fannie Mae in the near future. Moreover, it will relieve the
government from regular supervision of these firms.
The deal is subject to approval from the Federal Housing Finance
Agency, U.S. Treasury Department and other investors in Fannie
At present, both Freddie Mac and Fannie Mae have a Zacks Rank #2
(Buy). Other financial services stocks with the same Zacks Rank