Ellington Financial Inc., a real estate investment trust that acquired a controlling interest in reverse mortgage lender Longbridge Financial LLC last year, said Tuesday it has agreed to acquire Arlington Asset Investment Corp. (AAIC).
Under the terms of the merger agreement, each share of Arlington common stock will be converted to 0.3619 shares of Ellington Financial common stock, or approximately 11.7 million shares of Ellington Financial common stock in the aggregate, Ellington Financial said.
In addition, Arlington common stockholders will receive $3 million in cash in the aggregate, or $0.09 per share, to be contributed by Ellington Financial's external manager.
The closing stock prices for Ellington Financial and AAIC on May 26 imply an offer price of $4.77 per share of Arlington stock, a 73% premium to Arlington's share price and a 15% discount to diluted tangible book value per share as of March 31, Ellington Financial said.
Once the acquisition is completed, Ellington Financial said, its stockholders are expected to own about 85% of the combined company's stock, while AAIC stockholders are expected to own about 15%. In addition, Ellington Financial will assume Arlington's outstanding preferred equity, senior unsecured notes, and trust preferred securities, the company said.
After the deal closes, Ellington Financial is expected to have a pro forma equity capital base of over $1.5 billion, the company said.
The combined company will operate under the name Ellington Financial Inc., and its shares will continue to trade on the New York Stock Exchange under Ellington's ticker symbol, EFC. Ellington Financial Management LLC, an affiliate of Ellington Management Group LLC, will manage the combined company.
The transaction has been unanimously approved by the both companies’ boards of directors, and is expected to close in the fourth quarter of this year, subject to approval by AAIC's stockholders and other customary closing conditions, the companies said.
Ellington Financial CEO and President Laurence Penn will continue to lead the combined company, while Ellington Financial executives Michael Vranos, Mark Tecotzky, and J.R. Herlihy will remain in their current roles, the company said. The combined company will remain headquartered in Old Greenwich, Conn., and the board of the combined company is expected to expand to six directors through the addition of one AAIC-designated director.
"We are extremely excited about the opportunity to add a significant portfolio of assets — particularly low-coupon mortgage servicing rights — that align very well with our expertise and existing management platform," Penn said. "We believe that the benefits of this acquisition include greater operating efficiencies, a larger market capitalization, and attractive long-term unsecured debt and preferred equity capital. Upon closing, we believe that we will be positioned well to drive accretive earnings growth and provide strategic and financial benefits to our stockholders."
AAIC CEO J. Rock Tonkel Jr. agreed. "We are thrilled to combine AAIC with the Ellington Financial team to make a combined company that we believe will be positioned to take advantage of opportunities into the future," he said. "This transaction combines two complementary portfolios, and we look forward to working closely with the Ellington Financial team to complete the acquisition and deliver value for our stockholders."
Ellington Financial invests in a diverse array of financial assets, including residential and commercial mortgage loans, reverse mortgage loans, residential and commercial mortgage-backed securities, consumer loans and asset-backed securities backed by consumer loans, collateralized loan obligations, non-mortgage and mortgage-related derivatives, debt and equity investments in loan origination companies, and other strategic investments.
Arlington Asset Investment Corp. (AAIC), based in McLean, Va., invests primarily in mortgage-related assets and has elected to be taxed as a real estate investment trust (REIT).