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Annaly to buy Hatteras for $1.5B

Annaly CapitalManagement Inc. and HatterasFinancial Corp. said April 11 that they signed a definitive mergeragreement under which Annaly will acquire Hatteras for $1.5 billion in acash-and-stock deal.

The consideration will be paid in cash and Annaly commonshares. Under the deal, Hatteras is valued at $15.85 per Hatteras common sharebased upon the closing price of Annaly common share on April 8. The value of theconsideration represents a premium of approximately 24% to the 60-dayvolume-weighted average price of Hatteras common shares ending on April 8, anda multiple of 0.85x Hatteras' estimated book value per share as of Feb. 29.

Subject to the terms and conditions of the merger agreement,a wholly owned subsidiary of Annaly will commence an exchange offer to acquireall outstanding Hatteras common shares. For each Hatteras common share validlytendered in the exchange offer or converted pursuant to the second-step merger,Hatteras shareholders may elect to receive $5.55 in cash and 0.9894 Annalycommon shares; $15.85 in cash — the cash consideration option; or 1.5226 Annalyshares — the stock consideration option. Hatteras shareholders who elect thecash consideration option or stock consideration option will be subject toproration, in each of the exchange offer and the subsequent second step merger,so that the aggregate consideration will consist of approximately 65% of Annaly'scommon share and approximately 35% in cash. In addition to the consideration,Annaly would assume the existing notional $287.5 million in Hatteras 7.625%series A cumulative redeemable preferred shares.

The boards of Annaly and Hatteras unanimously approved thetransactions contemplated by the merger agreement, including the exchange offerand the merger. Hatteras' board approved the transactions upon the unanimousrecommendation of a special committee, which is comprised entirely ofindependent directors.

Noting the benefits of the transaction to theirshareholders, the companies said the deal expands and further diversifiesAnnaly's investment portfolio. Hatteras' portfolio, which consists of agencyresidential mortgage backed securities, residential whole loans and mortgageservicing rights, is complementary to Annaly's existing businesses.

The transaction is expected to be accretive to Annaly's bookvalue per share and core earnings in 2016. It will also help Annaly become the "largest,most liquid and diversified mortgage REIT in the world" and have a strongliquidity position.

Prior to closing, each of Annaly and Hatteras will pay itsrespective shareholders a pro rata common dividend based on its last regularquarterly dividend declared prior to closing and the number of days elapsedsince the record date for the most recent quarterly dividend, as of the dayimmediately prior to the closing date.

In connection with the transaction, Annaly entered into30-month consulting agreements with four members of Hatteras' executive team,including Chairman and CEO Michael Hough and President and COO Benjamin Hough.

The exchange offer is subject to customary closingconditions, including the tender for exchange of one share more than two-thirdsof all then outstanding Hatteras common shares when added to any Hatterascommon shares owned by Annaly and its wholly owned subsidiary. Followingcompletion of the exchange offer, the parties will promptly effect asecond-step merger without the approval of Hatteras shareholders under Marylandlaw pursuant to which all remaining Hatteras common shares not tendered in theexchange offer will be converted into the right to receive the sameconsideration as in the exchange offer, with the same election options andsubject to the same proration rules.

The transaction is expected to close by the end of the thirdquarter.

Wells Fargo Securities and Sandler O'Neill + Partners LPserved as financial advisers to Annaly, and Wachtell Lipton Rosen & Katzserved as Annaly's legal counsel. Goldman Sachs & Co. served as financialadviser to the Hatteras special committee. DLA Piper LLP (US) served as legalcounsel to Hatteras. Hogan Lovells US LLP served as legal counsel to theHatteras special committee.