Largest SPAC Deal in History to Take United Wholesale Mortgages Public
Merger Summary
The boom in special purpose acquisition companies (SPACs) has attracted the titans of Wall Street, including hedge-fund billionaire Bill Ackman, Citigroup veteran Michael Klein and former House Speaker Paul Ryan. Now, the Californian private equity billionaire Alec Gores can be added to that high-profile list.
This is due to one of Mr Gores’ special purpose acquisition companies undertaking a $16.1bn merger with the mortgage lender United Wholesale Mortgages. This merger with Gores Holdings IV, the name of the SPAC, is the largest such deal any company has ever made with an acquisition company of this kind.
By merging his SPAC with United Wholesale Mortgages (UWM), the private-equity mogul aims to capitalise on trends in the rapidly changing mortgage market and benefit from the growth prospects of the largest wholesaler in the US. It is also notably the flexibility offered by a SPAC arrangement, whereby UWM’s current management will retain 94% ownership of the business, that attracted both sides to the deal.
Although such a gargantuan transaction may convince the sceptics of these resurgingly popular vehicles, they certainly still have grounds for caution. One made notably clear was the ineffectiveness of the due diligence checks conducted by SPACs with the case of Nikola. The electric truck company that went public through a SPAC merger in June was recently accused of fraud by Hindenberg Research, arguably reinforcing the persisting uncertainty about the prospects of these unorthodox companies.
Deal Structure
Gores Holdings IV is set to take a notably small ownership stake in UWM, with current ownership retaining 94% of the business. Despite the meagre sacrifice of control, the 35-year-old lender is set to receive a total of $925m from this transaction: $425m which is held by the SPAC and $500m from a private placement which Mr Gores is leading.
The flexibility of the deal is particularly pleasing to both the acquirer and the target. Chief executive of Gores Holdings IV Mark Stone commented “One of the benefits of SPAC over an IPO is flexibility and structure” and arguably helps to explain why current management will continue to lead the business.
This transaction values UWM in the region of $16.1bn, which is 9.5x the company’s estimated adjusted net income in 2021 of $1.7bn.
Morgan Stanley and Deutsche Bank Securities acted as lead capital market advisors, lead financial advisors and exclusive private placement agents to Gores Holdings IV. Moellis & Company acted as another financial advisor. For UWM, Goldman Sachs acted as the principal financial advisor.
The completion of the merger is expected in Q4 2020,.
United Wholesale Mortgages Overview
United Wholesale Mortgages (UWM) is the largest wholesale mortgage originator in the US, with nearly 7,000 employees and a 4.6% share in the entire US mortgage market. The Michigan-based lender provides funding for mortgage loans and uses independent mortgage brokers to interact with the borrowers themselves. The company, from here on referred to as UWM, has a rather differentiated business model. It concentrates on providing its wholesale mortgage clients (brokers) with proprietary technology that enables them to process mortgage applications more effectively, resulting in lower rates and shorter processing speeds.
Gores Holdings IV Overview
The company undertaking the acquisition of UWM is Gores Holdings IV, the fourth SPAC launched by the private-equity billionaire Alec Gores. The blank-cheque company raised $425m after its IPO in January 2020 and is sponsored by an affiliate of Gores Group, a global private equity firm founded by Mr Gores in 1987.
Mr Gores employs a definitive strategy in identifying potential targets for his SPACs. In particular, he approaches market-leading and differentiated companies with robust equity stories that he views can benefit from his own experience in operating businesses for 35 years and the growth capital afforded by public equity markets.
Industry Insight
The mortgage industry in the United States, which gained particular notoriety after the Global Financial crisis of 2007–09, is a financial sector of significant size. This partly reflects the federal government’s plethora of programmes and entities to encourage the ownership of homes, house construction and mortgage lending. These include Fannie Mae, a government-sponsored enterprise (GSE) tasked with increasing lending in the mortgage market, and Freddie Mac, another GSE also intended to raise the quantity of financing available for home purchases. Partially as a result of such schemes, the earliest of which date back to the New Deal of the 1930s, the size of total mortgage debt in the US amounts to $16.01tn, a staggering 75% of US GDP in 2019.
In the US, “origination” is the process through which a borrower secures a mortgage. The borrower must, in turn, submit a loan application as well as a record of their financial and credit history to the underwriter, which is typically a bank or a wholesale mortgage lender such as UWM. The initial stages of client interaction, such as the mortgage application process, are managed by third-party independent mortgage brokers. While these brokers originate the loan, the role of wholesale mortgage lenders is to provide funding for the mortgage and also evaluate how creditworthy the loan may be.
Independent brokers, which are key agents in the UWM business model, revolves effectively act as agents of the wholesale lender and collect fees for their interaction with the mortgage applicants. The brokers can also sometimes add onto the loan rate which the wholesale lenders offers and generate revenue from the difference between the rate they receive from the wholesale lender and that which they charge customers.
Why did Gores Holdings IV merge with United Wholesale Mortgages?
Three key factors are arguably driving this merger. Firstly, it is Mr Gores’ desire to build on UWM’s competitive advantage in the mortgage sector and capitalise on trends in the mortgage industry as a whole. The transaction is also an opportunity for UWM to enhance their mortgage origination technology and hence provide a superior service to their mortgage broker clients, driving value creation for itself in the process. Lastly, this merger also offers UWM an opportunity to retain a vast degree of control and maintain its emphasis on family culture while raising funds to foster growth.
Strategic Rationale
First and foremost, this transaction reflects Mr Gores’ strategic aim to benefit from UWM’s market-leading position in the mortgage industry while also capitalising on other tailwinds in the mortgage industry. The Michigan-based mortgage lender’s 4.6% share in the entire US mortgage market means it is particularly well-positioned for growth opportunities as a public company. The competitive advantages it derives from this means the funds it gains through the acquisition will only accelerate growth in mortgage originations, drive down processing costs and reinforce UWM’s position as the top wholesale mortgage lender in the US. Gores Holdings IV, Mr Gores’ SPAC, will also be able to gain from wider trends in the mortgage sector. Recent acquisitions such as stock-exchange-operator ICE’s purchase of Ellie Mae, a software firm which processes mortgage applications, arguably reflect the wider trend of digitisation of the paper-based mortgage industry. With efficiency gains of up to 80% arising due to the application of AI in the mortgage origination process, the addressable market is likely to expand in size and profitability, and offer Mr Gores the opportunity to capitalise on the concomitant profit growth experienced by UWM.
For UWM, this transaction represents an opportunity to enhance the service it offers to is mortgage broker clients and thereby drive value creation for its own stakeholders. As a firm whose business model relies on providing proprietary technology which enables wholesale clients to process mortgage applications faster, the combined $925m UWM will receive is likely to contribute to enhancing its technology. This goal of President and Chief Executive Officer Mat Ishbia to “help our mortgage broker clients continue to build and grow their businesses” could be achieved through investing in AI. These technologies are capable of conducting credit evaluations and due diligence more cost-effectively than human employees, allowing UWM’s broker clients to continue providing lower rates to borrowers than its competitors and generating value for all stakeholders involved.
Lastly, being acquired by Mr Gores’ SPAC allows UWM to avoid the degree of dilution and loss of family culture which a traditional IPO may have caused. The fact that this transaction will see UWH retaining a vast 94% ownership stake in the company will allow the company to maintain its sense of family culture, something CEO Mr Ishbia argues has been integral to the company’s success since its foundation in 1986. The President and CEO notes that team members will be granted equity, arguably reflecting a strategy to retain talent and maintain its market-leading position in the mortgage industry. The sense of autonomy for Mr Ishbia himself was also a significant factor influencing this transaction. He noted “I believe there’s a lot of upside in it and I can derive that success by still owning 94% and continue to grow.” Given Mat Ishbia’s 7-year tenure as CEO of the company so far, retaining such a significant degree of control is arguably particularly important due to his history and vested interest in maintaining long-term (as opposed to return-on-investment driven) growth of UWM.
Long-Term Prospects
Although the “tailwinds” in the mortgage industry that Mr Gores identified have certainly been prominent, whether they last may depend on the speed of the US’ recovery from the coronavirus-induced recession. As investors fled to the safety of bonds, yields fell and sparked a surge in refinancings, a process which allows homeowners to take advantage of lower interest rates. As a result, mortgage applications increased to their most elevated level since 2009, with the value of the total annual originations expected to reach $2.61tn in 2020. However, with a second wave of COVID-19 cases imminent, consumers’ ability to pay these mortgages at albeit low rates may falter. A slowdown in the labour-market recovery in the US, with employers adding 400,000 fewer jobs in August than in July, may constrain incomes even further for those in non-white-collar sectors. If these lower-income and lower-credit consumers increase their demands for forbearances, delinquency rates (the percentage of mortgages on which customers have missed payments on) may rise and raise the risk of loan defaults. The resulting pressure and uncertainty placed on the US mortgage market may thereby limit the materialisation of these so-called tailwinds in the medium to long term.
Written by Alexander McFadzean (Oxford University)
