MILWAUKEE (AP) - MGIC Investment Corp. said Tuesday it does not believe it has to complete its purchase of Radian Group Inc., after their joint interest in a mortgage investor became all but worthless.
The stock deal was originally valued at nearly $4.9 billion, but shares of both companies have lost more than half their value since it was announced Feb. 6. The deal would exchange 0.9658 share of MGIC for each Radian share, and it valued Radian at $60.78 per share, three times the current price.
Trading of both companies' shares was halted Tuesday on the New York Stock Exchange. MGIC rose $1.60, or 4.8 percent, to $34.88 before the halt, while Radian slipped $2.38, or 10.3 percent, to $20.85.
Last week, private-mortgage insurer MGIC Investment and credit risk manager Radian Group revealed their investments in subprime mortgage investor C-Bass LLC could be worthless.
C-Bass, a $1 billion partnership, bet on mortgage credit risk by buying home loans and investments backed by mortgage debt.
However, mounting delinquencies and defaults among mortgages made to customers with blemished credit pushed banks to make margin calls on credit lines held by C-Bass.
Neither MGIC nor Radian have said how much of an impairment they will take related to the investments, but it could be up to 100 percent, less any tax benefit.
MGIC said Radian disagrees with its preliminary assessment. The company is reviewing other developments that may affect its obligation to close the deal.
MGIC has requested more information from Radian for an analysis by its board on whether to continue with the deal, a review it expects to complete by the week of Aug. 13.
Radian said in a news release it sees no reason why MGIC should back out of the deal, even with C-Bass' woes. The company said it remains committed to the deal and does not see a failing investment as a reason to back out under their contract.
'Radian is not aware of any developments that would impact MGIC's obligation to close the merger,' a statement said.
MGIC said later it would not make any additional comments.
The deal started to sour with the C-Bass announcement, Standard & Poor's analyst Stuart Plesser said in a note. Plesser said MGIC could take on more risk if it does acquire Radian, which it said has exposure to risky businesses like net interest margin securities and second-lien subprimes.
The matter will likely end up in court, said Jim Seward, professor of finance and the director of the Nicholas Center for Corporate Finance at the University of Wisconsin-Madison. He said such moves to back out of deals were rare -- he was hard-pressed to think of another one -- but given the widespread woes of the mortgage industry, anything is possible.
Radian will most likely fight to be bought out, as its own business continues to dwindle, he said.
'What's to lose at this point?' Seward said.
Both companies' shares have spiraled downward as the mortgage industry continues to falter. The day the deal was announced, MGIC shares closed at $70.09, while Radian shares closed at $66.51.
As of June 30, MGIC had invested approximately $516 million in C-Bass, including a $50 million unsecured credit line. Radian has invested approximately $518 million in C-Bass, including a $50 million unsecured credit line.
Radian agreed to be acquired by MGIC in February, creating a new company to be called MGIC Radian Financial Group Inc. The combined mortgage and credit risk insurance company was expected to have total assets of nearly $15 billion and insure some $290 billion worth of primary mortgages.
Banking consultant Bert Ely said MGIC's announcement shows how the wide reach of the troubled mortgage industry. Title insurers, appraisers and all the players in the mortgage industry are affected, he said.
'It's undoubtedly going to lead to further consolidation and also deals that go bust or just don't go through because of problems and complications, numbers that don't turn up or projections that don't turn up,' said Ely, who is based in Alexandria, Va.
Milwaukee-based MGIC is considered among the leading providers of private mortgage insurance in the country. It has a network of more than 5,000 lenders in the U.S. and Puerto Rico. The company's subsidiary, Mortgage Guaranty Insurance Corp., covered 1.3 million mortgages at the end of last year.
Radian, based in Philadelphia, also provides services such as municipal bond insurance and reinsurance.
Each company has about 1,200 employees.
AP Business Writer Deborah Yao in Philadelphia contributed to this report.
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