The biggest SPAC deal, a $16B wholesale mortgage lender, will go public soon

24 Sep, 2020 03:24
source: Barron's

Singularity Financial Hong Kong September 24, 2020 –The Biggest SPAC Deal Ever Was Just Announced. It’s With a $16B Wholesale Mortgage Lender (Source: Barron’s by Nicholas Jasinski and Shaina Mishkin)

United Wholesale Mortgage (UWM) will go public later this year through the highest-valued deal with a blank-check company ever, the company said Wednesday. It has plans to merge with Gores Holdings IV, a special purpose acquisition company, or SPAC, from serial sponsor Alec Gores.

The transaction values UWM at $16.1 billion, surpassing the $11 billion combination of MultiPlan and Churchill Capital III, backed by fellow SPAC veteran Michael Klein, announced earlier this year.

Gores Holdings IV (ticker: GHIV) stock fell close to 2% on Wednesday after the deal was revealed, to about $10.60. Better-known mortgage player Rocket Companies  (RKT)  made its debut in an initial public offering last month and faced lackluster demand from investors, having to reduce its listing price.

For UWM, management’s own projections have earnings falling in the next two years, and insiders are using the SPAC merger as a chance to cash out a portion of their stake. That could explain the deal’s lukewarm reception.

SPACs have boomed in 2020

109 IPOs have raised nearly $42 billion in proceeds—more than the past five years combined, according to data from SPAC Insider. Facing an uncertain and volatile market, more companies have chosen the SPAC route to going public than ever before. SPACs raise money from IPO investors as cash shells, with sponsors later identifying an operating business to merge with. Shares in the SPAC convert to shares in the target company once they combine.

United Wholesale Mortgage is the largest player in the U.S. wholesale mortgage market. Operating exclusively in the wholesale space, the Michigan-based company of more than 6,500 employees works with independent brokers to drive borrowers to their loans. That helps differentiate United Wholesale Mortgage from Rocket, which offers loans direct-to-consumer, as well as through brokers.

In a call with investors on Wednesday, UWM CEO Mat Ishbia said the broker model helps control costs related to customer acquisition and reduces its vulnerability to the cyclicality of the mortgage market. In 2019, the company’s share of the total mortgage market was 4.6%, it said in its investor presentation. It expects that share to rise to 6.7% in 2020 and to 9.2% by 2022. UWM sees its share of the wholesale mortgage market going from 35% this year to 40% in 2022.

Gores Holdings IV went public in January, raising $425 million. Its $10 IPO units included one common share and one-quarter of a warrant, exercisable at $11.50. The SPAC’s CEO is Mark Stone, a senior managing director at The Gores Group, a private-equity firm whose founder, Alec Gores, is the SPAC’s chairman. It is the latest of many SPAC deals for Gores.

His previous vehicles took public Hostess (TWNK) in 2016, Verra Mobility (VRRM) in 2018, and PAE (PAE) earlier this year. Gores is CEO of another SPAC, Gores Metropoulos (GMHI), that last month announced a deal to merge with Luminar Technologies. Gores Holdings V (GRSV), a $525-million SPAC also with Stone as CEO and Gores as chairman, is still searching for a target.

UWM and Gores IV expect their combination to close by the end of this year, with the ticker converting to UWMC. The deal includes the $425 million in the SPAC’s trust, along with another $500 million raised from a private investment in public equity, or PIPE. After expenses, the proceeds will be used to buy out a portion of UWM’s private shareholders, with none of the cash going to UWM. That is sometimes a red flag for SPACs, similar to a CEO of a publicly traded company selling his or her shares. Investors tend to prefer to see existing shareholders roll over their entire stakes into the combined public company, signaling they think the shares will be worth more in the future.

But existing UWM shareholders still have plenty of skin in the game: They will own nearly 94% of the combined public company. SPAC shareholders, PIPE investors, and Gores IV sponsors will hold the rest. Management is confident that UWM doesn’t need the outside money to grow its business, and they anticipate paying a dividend starting next year.

Like Rocket, UWM is having a big couple of years as borrowers take advantage of low interest rates by refinancing their mortgages. Loan origination volume grew from $42 billion in 2018 to $108 billion last year, and is projected to hit $200 billion in 2020. The company’s net income went from $67 million in 2018 to $303 million in 2019 and it expects to earn $2.1 billion this year. Company projections are for origination volume to hit $240 billion in 2022 while earnings slip to $1.8 billion.

Ishbia is bullish not only on UWM’s ability to grow its market share, but also on the growth of the wholesale mortgage business as a whole—especially once rock-bottom interest rates begin to rise. The company forecasts the wholesale channel’s share of the overall mortgage market growing to 33% by 2026, up from 20% in 2019 and 15% in 2016. While the current low-interest rate-driven boom in refis has been a boon for mortgage originators, Ishbia says UWM is poised to succeed as rate-sensitive refinance business dies down and home buyers seek out brokers for help obtaining a mortgage.

“Our scale, our technology, our efficiencies make it so we will win in these cycles, regardless if rates go up or down,” Ishbia said on the call. “We’ve done it before and we’re going to continue to do it again.”

Reference link: https://www.marketwatch.com/articles/united-wholesale-mortgage-to-go-public-valued-at-16-billion-51600887661?mod=mw_latestnews