Ellington Financial LLC (EFC) is set to acquire Arlington Asset Investment Corp (AAIC) in a stock-and-cash deal, pending AAIC shareholder approval and other customary conditions. The transaction, which has been unanimously approved by both company boards, is expected to close in Q4 2023.
As a real estate investment trust (REIT), Ellington Financial invests in a range of financial assets, including residential and commercial mortgage loans, while Arlington is primarily focused on mortgage-related and other assets. The merger is expected to increase the scale of operations and improve access to capital markets for the combined company.
Details of the Deal and Financial Implications
Under the agreement, each share of AAIC common stock will be converted into 0.3619 shares of EFC’s common stock, or around 11.7 million shares of common stock in total. The deal values each Arlington share at $4.77, representing a 73% premium to its share price based on the closing stock price of both firms on May 26.
In addition, EFC’s external manager will contribute $3 million in cash (or $0.09 per share) to Arlington’s common stockholders as part of the transaction. The combined company will be rebranded as Ellington Financial Inc.
Ellington Financial will also take over all of Arlington’s outstanding preferred equity, senior unsecured notes, and trust preferred securities. Following the merger, it is expected that Ellington Financial stockholders will own approximately 85% of the new company’s stock, while Arlington stockholders will own approximately 15%.
Expected Benefits of the Merger
The transaction is expected to increase Ellington Financial’s earnings in 2023 and book value within a year of the deal closing, with excellent long-term growth potential. The companies’ investment portfolios are in line with one another, and Arlington’s relatively low leverage is likely to provide enhanced returns for Ellington Financial’s targeted assets classes. The merger is also expected to provide increased operating efficiencies and a larger market capitalization for the combined entity.
Post-merger, Ellington Financial is expected to have a pro forma equity capital base of over $1.5 billion, with a pro forma market capitalization exceeding $1.0 billion, based on the closing price of EFC’s common stock on May 26. The addition of Arlington’s unsecured debt and preferred equity will provide an attractive cost of capital and a desirable target capital structure.
Management Comments
Ellington Financial CEO Laurence Penn commented that the company is ‘extremely excited’ about the prospects of the deal and the opportunity to add a significant portfolio of assets that aligns well with the company’s expertise and existing management platform. The acquisition will allow Ellington Financial to drive accretive earnings growth and provide strategic and financial benefits to its stockholders.
Similar Inorganic Expansion Efforts by Other Financial Stocks
Ready Capital Corporation recently acquired Broadmark Realty Capital Inc to create a leading non-bank lender to the lower and middle commercial real estate market, with a total equity capitalization of $2.8 billion. Each share of Broadmark was converted into the right to receive 0.47233 RC shares, or 63 million shares of Ready Capital common stock.
Over the past six months, EFC’s shares have declined by 9.7%, while AAIC’s shares have risen by 32.5%. Currently, EFC is rated as a Zacks Rank #4 (Sell), while AAIC is a Zacks Rank #3 (Hold).
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