Rocket is buying Mr. Cooper Group.
Another courageous step to consolidate the industry. Synergies appear attractive, but it does somewhat dilute the cyclical component to the bull case that is about leveraging incoming rate cuts.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
TLDR Summary
Just three weeks after their Redfin deal, Rocket has announced another huge acquisition. Mr. Cooper will quadruple Rocket’s mortgage servicing footprint to a market share of 17%. In return, Mr. Cooper’s shareholders will get 25% of the combined entity.
The deal circumstances are very different from Redfin. Mr. Cooper is not a restructuring case and it is not a rate cut bet. The company is highly profitable and its business will stabilize Rocket’s income statement which is notoriously vulnerable to swings in the real estate cycle.
Both companies have natural synergies in that Rocket can leverage Mr. Cooper’s servicing technology platform and Mr. Cooper can do likewise with Rocket’s origination platform. Management expects the deal to yield $500m in synergies. If valued at a 10x multiple, this would increase the combined pre-deal capitalization of both companies by about 15%. I like this deal because risks seem limited. Mr. Cooper’s business model works well on a stand-alone basis and Rocket’s shareholders are buying into it at just 14x LTM earnings.
As it’s a 100% share deal, it also doesn’t introduce risks associated with higher leverage. There can of course be negative signal when a company excessively dilutes shareholders through share deals. However, I have occasionally mentioned that my valuation scenario analysis based on mid-cycle earnings generation suggests a price target north of $20. This gives me comfort that Rocket stock is not unreasonably overvalued. In fact, residential real estate is just coming out of a deep cyclical trough. Betting courageously on a cyclical recovery now seems smart to me. Rocket management is seizing the opportunity by stepping up as the industry’s chief consolidator.