Well, it’s better than the alternative.
Freddie Mac (FRE) is trying to figure out a way to sell $10 billion of stock to avoid needing a Treasury bailout.
The good news is that the company’s stock has jumped sharply in the past week, which would make such an offer far less dilutive (assuming the announcement of the offer doesn’t crush the stock, which it might). The bad news is that, even if the company raises the money at the current stock price, shareholders could still get diluted by a haymaker 66%: Freddie’s market cap is only $5 billion.
Put differently, after this deal, shareholders who now own 100% of the company could end up owning only a third of it. And there are other challenges.
WSJ: A sale by Freddie of common and preferred stock could be tough to pull off. For starters, the preferred shares would require Freddie to offer a very high rate of return to attract buyers. The yield on one existing issue of Freddie’s preferred stock, for example, is about 13.8%.
At that rate, even a $5 billion preferred-stock offering would entail a $690 million annual payout, on top of the $272 million Freddie paid out on its existing preferred shares in the first quarter. That would reduce the money available to common-stock shareholders, cutting the value of those holdings and potentially sending the stock price lower.
The main buyers for any new-stock issues are likely to be existing shareholders world-wide, according to one person involved in the discussion, adding that a definitive plan hasn’t yet been determined.
In the short term, a sale of new shares might eliminate the need for the Treasury’s help, but a government bailout might still be required later. “At the heart of this crisis of confidence is uncertainty about the true financial condition of the companies,” says Armando Falcon Jr., their former regulator.
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