Shares of Fremont General shot up more than 40% on Tuesday after the troubled company said it would shed its commercial loan business and bring in a new management team known for turning around retail banks.
The actions, especially the purchase of a minority interest by Texas billionaire Gerald J. Ford, are fueling speculation that Fremont, which was caught in the wave of troubles affecting subprime mortgage lenders, will strengthen and expand its profitable retail deposit business in preparation for a sale.
The Santa Monica-based company said Tuesday it sold its commercial real estate lending business and a 30 percent interest in its $6.5 billion commercial loan portfolio to iStar Financial for $1.9 billion.
Fremont will retain a 70% stake in the portfolio. Fremont's commercial real estate business includes eight offices, and iStar said it plans to retain "the majority" of Fremont staff.
In exchange, iStar agreed to finance up to $4.4 billion in unfunded loan commitments. The commercial real estate unit lends money to developers to build or renovate condominiums, hotels and retail outlets.
Fremont also said a consortium led by Ford will take a minority stake in the company in exchange for $80 million in preferred stock and warrants to acquire 7.1 million additional shares.
Ford Named Chairman
Ford was named chairman and Carl Webb was appointed chief executive. Another member of the group, J. Randy Staff, will take over as chief financial officer.
The group will initially own 16% of the company with an option to increase its stake to 20%.
The transaction is subject to regulatory approval. After the sale has been approved, current CEO Louis J. Rampino will leave the company.
"The sale of the residential and commercial lending assets frees up the company's balance sheet and provides the new management a clean slate and a premier deposit-gathering platform to support future growth opportunities," the company said in a statement.
The announcement surprised Sky Capital analyst Theodore P. Kovaleff, especially because a large number of investors had been betting against the company by selling its stock short.
In a short sale, investors borrow shares of a company from a broker and promise to return them at a late date. Investors bet that they will be able to sell the shares and buy them back later at a lower price, thus making a profit.
Kovaleff noted that in recent weeks, about half of Fremont's outstanding shares were sold short. But Tuesday, Fremont shares shot up $2.89, or 40.6 percent, to $10. Shares had been trading in a 52-week range of between $5.55 and $21.62. The stock closed Monday at $7.11.
Shorts Get Hit
"That clearly says to me there were some shorts out there that have probably thrown in the towel," Kovaleff said. "The new management is definitely going to be a positive. What you say to yourself is, 'What is the estimated life of Fremont before it gets sold?'"
Ford became known for building Golden State Bancorp into the nation's second-largest savings bank, then sold it to Citigroup for $5.8 billion in 2002. He is worth $1.7 billion according to Forbes magazine.
Fremont General relied on making residential mortgages to people with low credit scores for about half of its business. The subprime market had fallen into disarray as borrowers missed payments more frequently, housing prices cooled and investors soured on mortgage-backed debt. That forced Fremont to sell the portfolio for a discount.
But unlike companies such as New Century Financial, which collapsed under the weight of its subprime portfolio, Fremont had a profitable commercial loan and retail banking business, with branches throughout California accepting passbook accounts and certificate of deposits.
In April, Fremont agreed to divest itself of its business lending to home buyers with subprime credit. On Tuesday, the company confirmed that Ellington Capital Management bought that unit.
In March, the company said it would comply with a federal cease and desist order to tighten its credit policies after bank regulators alleged that a Fremont subsidiary was operating "without effective risk-management policies and procedures" in its sub-prime mortgage and commercial real-estate lending operations.