National Australia Bank Makes $1.2 Billion Deal for HomeSide

National Australia Bank is storming into the U.S. mortgage business by buying HomeSide Inc., a young and innovative company that has quickly become a force in the U.S. market.

National Australia is paying a hefty $1.23 billion to become a leading U.S. player. It already owns Michigan National Corp. and hopes to broaden HomeSide's strategy of originating loans through correspondents in markets away from its home turf.

But experts say the purchase of HomeSide, known for its efficiency as a servicer, would also provide the Melbourne-based bank with the know-how to cut its own servicing costs dramatically. About 40% of National Australia's loan volume in Australia is in mortgages.

National Australia, which has been rumored for the last few months to be interested in buying the credit card company Advanta Corp., would gain access to the more than 1.1 million American borrowers in HomeSide's $97 billion servicing portfolio.

"This is just a further step in our broader international strategy - a strategy of building up strong retail financial services," said Bob Prowse, National Australia Bank's group general manager for the United States and Asia.

But observers saw an additional benefit for the Australian bank. "One of the driving forces behind the deal had to be reducing National Australia's cost of servicing," said Angelo R. Mozilo, vice chairman of Countrywide Credit Industries, Pasadena, Calif., the nation's second-largest mortgage servicer.

Mr. Prowse said the bank may be able to lower servicing costs on its Australian portfolio of about $22 billion by as much as 45%, simply by using HomeSide's servicing methods. To that end, HomeSide's chief executive officer and chairman, Joe K. Pickett, would move to Australia to oversee mortgage operations there.

For HomeSide, which mainly originates loans through a network of correspondents, the deal gives the Jacksonville lender the chance to expand its operations outside the United States, where the market has been plagued by intense competition and razor thin margins.

"We will be the first truly international mortgage banking company," said Hugh R. Harris, HomeSide's chief operating officer. Mr. Harris would be in charge of day-to-day domestic operations.

National Australia owns banks in Australia, New Zealand, the United Kingdom, Ireland, and one in the United States-Michigan National. Observers said more foreign banks will be likely to seek partners in the United States to lower their mortgage expenses.

"Servicing costs overseas generally run four times what they do here. The potential for synergies are enormous," said Warren Lasko, president of the Mortgage Bankers Association of America's international division.

Analysts said the acquisition would provide HomeSide with better access to capital that it could spend on technology investments and purchases of servicing portfolios. National Australia, with $123.7 billion of assets, is the world's 61st largest bank.

The deal also clears up HomeSide's muddled ownership structure. HomeSide was formed in March 1996 when BankBoston Corp. sold its mortgage banking subsidiary to two venture capital firms-Thomas H. Lee & Co. and Madison Dearborn Partners-in exchange for an ownership stake in the new company.

Barnett Banks Inc. sold its mortgage servicing operations to HomeSide in May of that year, also for an ownership stake.

HomeSide went public in January. BankBoston, Barnett, and the two venture capital firms own 76% of the company's stock.

Sources close to the deal said National Australia Bank first contacted HomeSide in June of this year about forming an alliance, not to purchase the entire company.

The deal was complicated when NationsBank Corp. agreed to buy Barnett in August. HomeSide's stock rose on rumors that NationsBank would eventually buy out the remaining stake, making pricing the transaction difficult.

But NationsBank, which already has one of the largest mortgage banking operations in the country, no longer has to worry about what to do with the HomeSide stake it inherited.

It appears, sources said, that NationsBank gave its blessing to the HomeSide deal. Peter J. Manning, an executive vice president of BankBoston Corp., said BankBoston would receive a $170 million pretax gain from selling its stake in HomeSide. Sources said NationsBank would reap a similar amount from the sale of Barnett's stake in the company.

HomeSide's stock closed at $26.75, up $2.50 on the news. It was one of the few stocks that resisted the plunge in the U.S. market.

HomeSide was advised by Smith Barney Inc. and Merrill Lynch & Co. Cohane Rafferty, Hanover Capital Partners Ltd., and Keefe, Bruyette & Woods Inc. advised National Australia Bank.

HomeSide was represented by the law firm Hutchins, Wheeler & Dittmar, while Sullivan & Cromwell represented National Australia Bank.

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