8-K: UWM Holdings to Acquire Two Harbors in All-Stock Merger

UWM Holdings Corporation announced an agreement to acquire Two Harbors Investment Corp. in an all-stock merger, with Two Harbors shareholders receiving 2.3328 shares of UWMC Class A common stock per share.

Summary

• UWM Holdings Corporation (UWMC) has entered into an Agreement and Plan of Merger to acquire Two Harbors Investment Corp. (Two Harbors).
• Two Harbors will merge into UWM Acquisitions 1, LLC, a wholly owned subsidiary of UWMC, with Merger Sub surviving.
• Each outstanding share of Two Harbors common stock will be converted into the right to receive 2.3328 shares of newly issued UWMC Class A common stock, plus cash for fractional shares.
• Two Harbors' Series A, B, and C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock will be converted into equivalent UWMC Series A, B, and C Preferred Stock.
• The Boards of Directors of both UWMC and Two Harbors have unanimously approved the Merger Agreement and the transactions.
• The merger is subject to customary closing conditions, including approval by Two Harbors stockholders and various regulatory consents.
• The transaction is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986 for U.S. federal income tax purposes.
• Two Harbors' restricted stock units (RSUs) will convert into the common merger consideration, performance share units (PSUs) will convert at the greater of target or actual performance, and restricted stock (RSAs) will fully vest and convert into the common merger consideration.
• A termination fee of $25,400,000.00 is payable by Two Harbors to UWMC under certain circumstances, such as a change in recommendation or termination for a superior proposal.

Sentiment

Score: 7

Explanation: The merger represents a strategic expansion for UWM Holdings, unanimously approved by both boards, and includes provisions for employee and director protections, though it introduces integration and regulatory risks.

Positives

• The merger has been unanimously approved by the Boards of Directors of both UWM Holdings Corporation and Two Harbors Investment Corp., indicating strong internal support.
• The transaction is structured to qualify as a reorganization under Section 368(a) of the Code, which is intended to provide tax-free treatment for U.S. federal income tax purposes.
• Two Harbors preferred stockholders will receive equivalent preferred stock in UWMC, ensuring continuity of their investment class.
• Provisions are in place to protect Two Harbors employees, including maintaining base compensation, annual bonus opportunities, and benefits for a period following the closing, and providing severance benefits for certain terminations.
• Existing indemnification and D&O insurance for Two Harbors directors and officers will be maintained for six years post-merger, subject to a cap.

Negatives

• The issuance of new UWMC Class A common stock will result in dilution for existing UWMC shareholders.
• Two Harbors is obligated to pay a termination fee of $25,400,000.00 to UWMC if it changes its recommendation or terminates the agreement to pursue a superior proposal, which could limit its flexibility.
• The merger is subject to various regulatory approvals, including the Hart-Scott-Rodino Antitrust Improvements Act, which could introduce delays or require concessions.
• The success of the merger is contingent on the approval of Two Harbors stockholders, which is not guaranteed.

Risks

• Failure to obtain the required affirmative vote of Two Harbors stockholders.
• Failure to obtain necessary regulatory consents or clearances, including under the Hart-Scott-Rodino Antitrust Improvements Act and other Competition/Foreign Investment Laws.
• The issuance of any governmental order, decree, ruling, or injunction permanently restraining, enjoining, or prohibiting the merger.
• The occurrence of a material adverse effect with respect to Two Harbors or UWMC on or after the date of the Merger Agreement.
• The merger failing to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986.
• Potential for stockholder litigation (Transaction Litigation) against directors or officers related to the merger.
• The possibility of a Company Competing Proposal emerging, which could lead to the termination of the agreement and payment of a termination fee.
• Failure to satisfy other customary closing conditions, such as the accuracy of representations and warranties and compliance with covenants.

Future Outlook

The merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. Post-merger, the UWM Holdings Corporation Board will be expanded by one member, with a Two Harbors designee appointed to fill the new vacancy. UWM Holdings will nominate this designee for election at its first annual stockholder meeting following the closing.

Management Comments

• The Board of Directors of UWM Holdings Corporation unanimously approved the Merger Agreement and the transactions contemplated thereby.
• The Merger Agreement and the consummation of the transactions contemplated thereby have been unanimously approved by Two Harbors Board of Directors, and the Two Harbors Board has resolved to recommend that the Two Harbors Stockholders approve the Merger and the other transactions contemplated by the Merger Agreement.

Industry Context

This merger represents a strategic move within the financial services sector, specifically involving a mortgage lender (UWM Holdings) and a real estate investment trust (Two Harbors). Such transactions can indicate a trend towards consolidation, diversification of assets, or expansion of service offerings within the mortgage and real estate investment markets, potentially aiming for increased market share, operational efficiencies, or enhanced capital deployment strategies.

Management Changes

Corporate Governance

Legal Proceedings

• Each party will provide prompt written notice of any stockholder demands, litigations, arbitrations, or similar actions (Transaction Litigation) related to the merger, and will cooperate in their defense or settlement.

Stakeholder Impact

• Shareholders of Two Harbors: Will receive UWMC Class A common stock and cash for fractional shares, or equivalent UWMC preferred stock, subject to stockholder approval.
• Shareholders of UWM Holdings Corporation: Will experience dilution due to the issuance of new shares as merger consideration.
• Employees of Two Harbors: Will receive base compensation, annual bonus/incentive opportunities, and employee benefits no less favorable for specified periods post-closing, and severance benefits for certain terminations.
• Directors and Officers of Two Harbors: Will benefit from continued indemnification and D&O insurance coverage for six years post-merger, and one designee will join the UWMC Board.

Next Steps

• Two Harbors will hold a stockholder meeting to obtain approval for the merger and other related transactions.
• Parent (UWMC) will file a Registration Statement on Form S-4 with the SEC, and the Company (Two Harbors) will file a Proxy Statement.
• Both parties will work to obtain all necessary regulatory consents and clearances, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act.
• UWMC will take corporate action to increase its Board of Directors by one member and appoint a person designated by Two Harbors to fill that vacancy.
• UWMC will cause the newly issued common and preferred stock to be approved for listing on the NYSE.
• The parties will cooperate to ensure the merger qualifies as a reorganization for U.S. federal income tax purposes.
• UWMC and Two Harbors will comply with obligations under the Convertible Notes Indenture and Senior Notes Indenture.
• Post-Effective Time, Two Harbors Common Stock and Preferred Stock will be delisted from the NYSE, and its registration under the Exchange Act will be terminated.

Key Dates

Keywords

UWM Holdings, Two Harbors, Merger, Acquisition, Stock-for-Stock, REIT, Mortgage, Financial Services, Corporate Governance, SEC Filing, 8-K