WaMu Takes $7 Billion; Pain for Some, Gain for New Investors

Implications: Washington Mutual (WaMu) cut a deal with TPG and other investors for a $7 billion capital injection by issuing common stock and preferred convertible stock. In addition, 1st quarter write offs of $3.5 billion contributed to an estimated first quarter loss of $1.1 billion. Clearly WaMu needs capital, but is this the best option for existing shareholders? What is the upside for shareholders and the new investors? How long will WaMu's troubles last? Is WaMu destined to be acquired? If so, by whom?

Analysis:

WaMu shareholders must be depressed. After suffering through an 80% decline in stock price in just 15 months, they have now lost the quarterly dividend and have been effectively diluted by 50%. This deal adds some 176 million common shares at $8.75/share and another 628 million shares through a $5.5 billion convertible preferred share offering at the same strike price. This deal is priced at below book value and 33% below the pre-deal trading price, demonstrating an extremely weak position for WaMu.

1. WaMu still has some toxicity in its earning assets, particularly subprime mortgages and home equity loans. The latter portfolio includes about $20 billion of home equity lines underwritten at a combined LTV in excess of 80% - before housing prices started to fall.

2. When will the "new" shareholders look to sell? If WaMu's pre-dilution all time high price was near $46, then expect a post-dilution target price range of $17 - 20.

3. WaMu's ability to remain independent is substantially eliminated. The institutional investors will want an exit at a decent to excellent appreciation. WaMu's footprint on the West Coast, particularly California, and in Texas and Florida will be appealing to the largest banks. The short list of buyers will include JP Morgan Chase, HSBC, and Royal Bank of Scotland.

4. WaMu's key FinTech suppliers (i.e., CSC Hogan, Fidelity's LPS, Total Systems) are faced with an uncertain future. Surviving a mega-acquisition is a long shot.