Fidelity for Lender Processing

Zacks

In an effort to strengthen mortgage services business, America’s largest title insurance company, Fidelity National Financial Inc. (FNF) recently inked a deal to acquire Lender Processing Services Inc. (LPS) for $2.9 billion or $33.25 per share.

Florida based Lender Processing is a leading provider of comprehensive technology solutions and services, data and analytics to the paramount mortgage lenders and investors of the nation.

The deal is expected to culminate in the fourth quarter of 2013.

Fidelity will pay 50% of the purchase consideration in cash and the remaining 50% in shares of FNF common stock. The financial position of the company is strong enough to support the transaction.

Following the culmination of the deal, the ServiceLink business of Fidelity will be merged with Lender Processing to form a new consolidated holding company. Fidelity will retain 81% stake in the new holding company and sell the remaining 19% for a cash consideration of $381 million to the funds associated with Thomas H. Lee Partners, L.P.

As per the deal, Fidelity’s shares are valued at $25.489 per share, translating to a fixed exchange ratio of 0.65224 shares for each LPS share. As a result Fidelity is expected to issue 57.4 million shares to LPS shareholders, which represents 20.151% of Fidelity’s outstanding shares.

According to the agreement clauses, if Fidelity’s average common stock price at closing is higher than $24.215, there will be no change in the 0.65224 exchange ratio and Lender Processing’s shareholders will be benefited from any increase in share price of FNF’s common stock portion of the purchase consideration.

If the average common stock price at closing lies within $20–$24.215, the company will increase the number of shares issued to Lender Processing’s shareholders so that LPS share holders receive a minimum of $32.419 per share in total. Again if the average common stock price at closing is less than $20.00, the exchange ratio will be fixed at 0.7897 and LPS will be allowed to nullify the agreement. However, if Fidelity pays a greater amount of the consideration in cash and the average common stock price at closing is higher than $26.763, the exchange ratio will be fine-tuned to reflect the increased value received at closing without altering the consideration mix.

Per the agreement, Lender Processing also has an option to explore other acquisition proposals from third parties effective through Jul 7, 2013.

The mortgage industry is stressed by increasing regulations. Fidelity is no exception. The combination of FNF and LPS will address these challenges faced by the industry and provide comprehensive and best solutions to the problems.

Following the acquisition, the company will emerge as a primary provider of title insurance, mortgage technology and mortgage services in the U.S.

Additionally, Fidelity National expects the acquisition to generate cost synergies of more than $100 million as well as be accretive to future earnings. Moreover, addition of Lender Processing Services to its portfolio will ensure a diversified as well as a recurring revenue base for Fidelity National. In the first quarter of 2013, Fidelity’s revenues increased 72.3% year over year to $2.1 billion. We expect the acquisition to ramp up revenues further.

Fidelity has undertaken a number of acquisitions and partnerships in recent times to strengthen its portfolio. In this line, in Feb 2013, Digital Insurance, a wholly owned subsidiary of Fidelity, announced a partnership with CUNA Mutual Group, a financial service provider dedicated to catering to the members and customers of employee unions.

Fidelity currently carries a Zacks Rank #2 (Buy). Among others in the industry, American Safety Insurance Holdings Ltd (ASI) and Global Indemnity plc (GBLI) carry a favorable Zacks Rank #1 (Strong Buy) and appear impressive.

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