Mat Ishbia and his family will slightly reduce their ownership of United Wholesale Mortgage (UWM), a step to make the company more attractive to long-term investors – and, hopefully, to leave behind the “meme stock” label, according to analysts who follow the wholesale lender.
UWM Holdings Corporation announced on Tuesday that its controller shareholder SFS Holding Corp. – a holding firm controlled by Mat Ishbia and his father, Jeffrey Ishbia – is selling 50 million Class A common stocks on a secondary offering.
According to the company, no shares are being sold by UWM. Instead, SFS will receive all proceeds. J.P. Morgan and BofA Securities are acting as joint lead book-running managers.
The secondary offering has the potential to bring $297.5 million to the family (at $5.95 per share on Nov. 17). If underwriters purchase an additional 7.5 million shares available at the public offering price, the family can receive to $342.1 million.
However, SFS’s ownership would decrease from 93.6% to 90.6% of Class A common stocks.
“It is hard to garner up a lot of institutional investor interest in this stock. Only because the CEO ends up owning a big chunk of the company,” said Kevin Heal, senior analyst and fixed income strategist at Argus Research.
Institutional investors usually look for companies with at least 20% public float, Heal said. “But the transaction will increase the public float and decrease the amount of ownership level that the CEO and affiliated family members have in the company.”
Still, according to SEC documents, SFS has around 79% of the combined voting power. In addition, as long as SFS owns at least 10% of the outstanding common stocks, it will have the final word on actions requiring stockholder approval, such as removal of directors and board size.
Heal said that the secondary offering is a sign that UWM does not want to be a “meme stock,” a phrase used for stocks that had gone viral online by attracting retail investors. If cheap and with a small public float, these stocks can be more volatile.
UWM declined to comment, citing Securities and Exchange Commission rules.
According to one analyst from a big bank, who preferred not to be identified, the impact of the secondary offer will be a reduction in the stock price in the short term. On Wednesday, UWM closed at $5.95 a share, a 9.98% decline from Tuesday. But, according to the same analyst, in the long term, the company may attract more institutional investors, bringing more stability and pushing prices up.
The transaction also puts the company closer to the S&P 500 index, which requires a 10% public float level, among other rules, such as having a market capitalization of at least $11.8 billion and four consecutive quarters of positive earnings.
From January to September, UWM, the nation’s largest wholesale lender, originated $171.3 billion in residential mortgage loans, an increase of 34% year-over-year. During the first three quarters of 2021, UWM reported $1.33 billion in net income, down 34% compared to the same period of 2020, arguably the industry’s biggest boom period.
On Monday, UWM announced plans to borrow $500 million through notes that come due in 2027, at a 5.75% interest rate. The proceeds will “be used for general corporate purposes and to fund future growth,” UWM said. Analysts said the company has a “comfortable” debt situation.
According to analysts, overall mortgage activity is expected to cool down in the coming years as interest rates rise, putting pressure on profit margins and challenging mortgage executives to overcome the cyclical nature of the industry.
Ishbia has been outspoken in his belief that UWM’s position as the top wholesale lender gives it an edge in purchase business compared to its competitors. He’s also noted that UWM can generate profits in difficult market conditions when others cannot because UWM’s cost to originate a loan is lower.
But, like many of its chief rivals, UWM’s stock has sagged. And, like its rivals, it’s engaging in stock buyback programs. UWM announced a $300 million buyback in May. And on Tuesday, the company said it will buy $100 million in stocks owned by Ishbia-helmed SFS Holding Corp., at the same price as the secondary offer, paid with existing cash.
In the third quarter earnings call with analysts, Tim Forrester, UWM’s chief financial officer, said the company will continue to evaluate opportunities for buying back more stocks in future quarters.
“Those efforts will continue to be balanced with our desire to maintain or even establish more float for investors and maintain our profile and availability for future long-term investors.” He mentioned the company had acquired approximately 2.7 million shares through a stock buyback program for roughly $21 million to date.
UWM went public in February after merging with a special purpose acquisition company (SPAC) called Gores Holdings IV. The company at the time had a valuation of $16.1 billion. On Thursday, the company’s market cap was down to $9.2 billion.
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