Business Context and Reporting Period
This Form 8-K Current Report, dated June 30, 2023, announces that Ellington Financial Inc. ("EFC") has entered into a definitive Merger Agreement with Great Ajax Corp. ("Great Ajax"). Under the agreement, Great Ajax will merge with a wholly-owned subsidiary of EFC, with the surviving entity being contributed to EFC's operating partnership. The transaction was unanimously approved by the EFC Board of Directors.
Key Financial Metrics and Transaction Terms
The filing details the structure of the merger consideration rather than historical financial performance metrics such as revenue or cash flow.
- Exchange Ratio: Holders of Great Ajax Common Stock will receive EFC Common Stock based on a fixed exchange ratio of 0.5308, subject to adjustments.
- Contingent Cash: A contingent cash purchase price may be paid to Great Ajax shareholders depending on specific repurchase terms prior to closing.
- Termination Fee: If Great Ajax terminates the agreement to accept a superior proposal or changes its recommendation, it must pay EFC a termination fee of $6,867,000.
- Debt Assumption: The surviving company will assume Great Ajax's 7.25% Convertible Senior Notes due 2024 and the 8.875% Senior Unsecured Notes due 2027 of Great Ajax Operating Partnership L.P.
- Preferred Stock: Great Ajax is required to redeem or extinguish its Series A and Series B Preferred Stock prior to closing.
Material Changes and Conditions
The transaction is subject to several material conditions precedent, including:
- Approval by a majority of Great Ajax stockholders.
- Effectiveness of a registration statement on Form S-4.
- Listing approval of the new EFC shares on the New York Stock Exchange.
- Confirmation of REIT status for both parties and tax opinions confirming the transaction qualifies as a reorganization under Section 368(a) of the Internal Revenue Code.
- Termination of the Great Ajax Management Agreement and delivery of all material contracts.
- Absence of a material adverse effect on either party.
The agreement includes a "no-shop" provision restricting Great Ajax from soliciting competing proposals, with exceptions for superior proposals that allow for termination upon payment of the fee.
Guidance, Outlook, and Risks
Management anticipates the merger will result in a combined company with enhanced scale, market presence, and portfolio diversification. Expected benefits include:
- Accretion to earnings and improved operating efficiencies.
- Enhanced access to securitization markets and capital.
- Strategic alignment of Great Ajax's assets with EFC's management platform.
- Anticipated synergies regarding Great Ajax's equity investments in its affiliated servicer, Gregory Funding LLC.
Risks and Contingencies: The filing includes extensive forward-looking statements warning that actual results may differ due to risks such as failure to consummate the merger, inability to realize expected synergies, integration challenges, changes in interest rates, mortgage default rates, and regulatory changes. The transaction must be completed by January 31, 2024, or it may be terminated.
Investor Verification Checklist
- Verify the final exchange ratio and any adjustments made prior to the Effective Time.
- Confirm the outcome of the Great Ajax stockholder vote and the effectiveness of the Form S-4 registration statement.
- Review the definitive proxy statement/prospectus for detailed financial projections and risk factors.
- Monitor the status of the redemption of Great Ajax's Series A and Series B Preferred Stock and Warrants.
- Assess the impact of the assumed debt (7.25% Convertible Notes and 8.875% Senior Notes) on the combined entity's leverage.
- Confirm that both entities maintain their REIT qualification status post-merger.