A few weeks ago I wrote up why I thought Chimera was undervalued (Part 1 & Part 2). The stock is up 8% today on news that Annaly(NLY) offered to buy its other subsidiary, Crexus (CXS), for a 5% premium to book. I believe that Annaly will eventually buy Chimera and believe that book value is over $3.20.
Annaly invests in agency securities. It subsidiary Crexus invests in CMBS. Chimera, Annaly's other subsidiary invests in non-agency RMBS. Annaly said on its latest conference call that the opportunities in agency securities are not attractive because the Fed has distorted the market. Now that Obama has been re-elected for a second term it makes it likely that these distortions will not end any time soon. It makes sense for Annaly to diversify into other markets.
The reason I believe that Annaly has offered to buy Crexus but not Chimera is because Chimera is not current on its financials. It is a matter of time before Chimera becomes current and when they are I believe they will be bought by Annaly. The type of assets that Chimera holds had a tremendous rally in the third quarter. Chimera last reported economic book value of $2.87 as of the end of June. I estimate that current economic book value is over $3.20. If Annaly pays the same premium that it paid for Crexus that would equal roughly $3.35