Shares of Fremont soared 40% in early trading Tuesday as an outside investor group set plans to take control of the scandal-tarred lender.
New York-based iStar will take over Fremont's commercial real estate business and take a 30% stake in Fremont's $6.5 billion commercial loan portfolio. Fremont will retain a 70% stake in that pool. iStar also agreed to fund up to $4.4 billion worth of unfunded loan commitments associated with the portfolio.
iStar said it expects the deal to add 10 to 20 cents a share to earnings this year. It said it has interim financing committed to fund the transaction that it expects to replace through the issuance of debt and equity securities sometime following the closing of the transaction. After the closing, iStar's total assets will exceed $14 billion.
"This acquisition will position iStar for accelerated growth, giving us a deeper presence in regional markets, hundreds of new high-end customers and an experienced team that has historically been strong in construction and senior lending," said CEO Jay Sugarman.
"The combination of iStar's existing real estate organization with Fremont's commercial real estate business will create one of the strongest construction and direct origination platforms in the industry. Upon closing, our combined originations group will be able to offer new customers a broad range of innovative, custom-tailored financing solutions, a signature strength of iStar," Sugarman said.
Fremont, which earlier this year consented to a cease-and-desist order from the Federal Deposit Insurance Corp. that forced it out of residential subprime lending, said an investor group led by Gerald J. Ford will take control of Fremont through an $80 million preferred stock investment. Carl Webb will become CEO and Randy Staff will be finance chief.
The minority investment by the Investor Group includes exchangeable non- cumulative preferred stock in the bank that will be exchangeable into common stock at a price of $8.44 per share, subject to certain adjustments.
The Investor Group also will receive warrants for an additional 7.1 million shares of the Company's common stock. These warrants have a term of approximately 15 months and a strike price of $8.44, subject to certain adjustments. Subject to stockholder approval, the Investor Group also will receive warrants to purchase an additional approximately 4 million shares (under the same terms as the initial warrants), for a total of 11.1 million shares.
If the stockholders approve issuance of the additional warrants, the conversion price of the preferred stock and warrants would increase to $9 per share, subject to certain adjustments. Assuming the issuance of all the common shares underlying the preferred stock and the warrants, the Investor Group will hold approximately 20 percent of the then outstanding common stock of the company.