Fitch Ratings believes that the probability that JPMorgan Chase & Co.
(JPMC) will complete its acquisition of The Bear Stearns Companies, Inc.
(BSC) has increased under the amended terms (announced today). That
said, Fitch has not modified its ratings of BSC, as significant risk to
BSC debtholders remains if the transaction is not completed.
Earlier today, JPMC announced amended terms and conditions of its
agreement to acquire BSC and, in the interim, its guaranty of BSC's
obligations. Fitch believes that the motivation to amend the terms of
this transaction on the part of all parties involved was primarily to
reduce the uncertainty that JPMC will complete the acquisition of BSC.
The amended terms call for JPMC to pay significantly more for BSC,
albeit still substantially less than the last reported book value, and
to assume somewhat more risk with respect to certain of BSC's assets.
Offsetting this, the transaction is considerably more likely to be
completed. Of note, JPMC is expected to have 39.5% of BSC's shares to
vote. In addition the merger agreement limits qualifying alternative
bids to those from other institutions that have, at minimum, the
equivalent level of financial wherewithal (including liquidity and
capital) as JPMC to provide the same comprehensive guarantees, and, at
the same time, enter financing and support arrangements with the Federal
Reserve sufficient to enable BSC 'to conduct business in the ordinary
course.'
The amended agreement calls for JPMC to exchange 0.21753 share of JPMC
common stock for each share of BSC, valuing the offer at approximately
$10 per BSC share. This is increased from approximately $2 per BSC share
in the original agreement. JPMC has also entered a purchase share
agreement to acquire 95 million BSC shares at the same price in a
transaction expected to close on or about April 8, 2008. Importantly,
because the sale of these shares constitutes more than 20% interest in
BSC, BSC's Audit Committee and Board of Directors agreed to the use of
an exception to the NYSE Shareholder Approval Policy that is permitted
when the financial viability of the listed entity is in jeopardy.
Other terms of the transaction were also amended. JPMC will now absorb
the first $1 billion of loss on a segregated portfolio of $30 billion of
BSC assets, primarily mortgage related; the Federal Reserve will fund
the remainder of the portfolio on a non-recourse basis to JPMC. In
addition, terms of the Guaranty Agreement under which JPMC will
guarantee all trading and counterparty obligations of BSC have been
expanded and clarified. Among the expanded provisions, JPMC will
guarantee all BSC's obligations to the Federal Reserve Bank of New York.
Regulatory and board approvals for this transaction have already been
received, although the transaction remains subject to shareholder
approval. As part of the amended agreement, the shareholder vote will
remain open for the lesser of 120 days or until the transaction is
approved. This is in contrast to the original agreement which called for
the shareholder vote to remain open for up to 12 months.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant policies
and procedures are also available from the 'Code of Conduct' section of
this site.
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