Fidelity Adjusts Consideration Mix

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A leading title insurer, Fidelity National Financial Inc. (FNF) amended its consideration mix associated with the acquisition of Lender Processing Services Inc. (LPS) announced on May 28, 2013.

The purchase consideration equated to $2.9 billion or $33.25 per share. Initially at the time of announcement, Fidelity sought to pay 50% of the purchase consideration in cash and the remaining 50% in shares of FNF common stock. At present, the company decided to increase the cash component and simultaneously decrease the stock component, both by $500 million. This translates into a proportion of cash payment of approximately 67% and that of stock payment of 33%.

Out of the $500 million adjustment, Fidelity will provide $300 million directly. The remaining $200 million will be provided from funds affiliated with Thomas H. Lee Partners, L.P. (“THL”).

The acquisition is expected to culminate in the fourth quarter of 2013, subject to regulatory approval. Following the culmination of the deal, the ServiceLink business of Fidelity will be merged with Lender Processing to form a new consolidated holding company.

Initially, Fidelity was to 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. Pursuant to the adjustments, Fidelity will retain 71% stake in the new consolidated holding company and sell 29% for a cash consideration of $581 million to THL.

As per the May 28 announcement, Fidelity’s shares have been 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.  The increase in cash consideration has led to an alteration in the fixed exchange ratio to 0.42948. Concurrently, Fidelity will issue nearly 37.8 million shares to LPS shareholders, which represents 14.2% of Fidelity’s outstanding shares.

However, this is not the end. The company has kept an option open to further increase its cash portion of the consideration if needed.

Consideration mix that accounts for a majority portion to be paid in stocks brings volatility to the entire deal. Now, the increase in the cash component and reduction in stock component in the aforementioned deal will reduce the LPS stockholders’ exposure to stock price volatility of FNF. This is expected to infuse more stability to the amount receivable by LPS shareholders. The lesser shares issued will lower the dilution of FNF share capital

We expect the addition of Lender Processing in Fidelity’s portfolio to aid the company to generate higher revenues and add value to all Fidelity shareholders. 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. The long term sales growth for the company is projected at 7.31%.

Fidelity currently carries a Zacks Rank #2 (Buy). Among others in the industry, Montpelier Re Holdings Limited (MRH) and Markel corporation (MKL) carry a favorable Zacks Rank #1 (Strong Buy) and appear impressive.

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