Fidelity, LandAmerica agree to merger
Friday, November 7th, 2008Fidelity National Financial Inc. plans to acquire troubled LandAmerica Financial Group Inc. in a deal it claims would reduce the combined debt of the two companies by $250 million and create a title insurance giant controlling nearly half of the market.
LandAmerica surprised investors this week by postponing the planned release of third-quarter results. Four other major companies — that, along with LandAmerica, controlled 93 percent of the $14 billion U.S. title insurance market in 2007 — have all reported third-quarter losses (see Inman News story).
Fidelity, which reported a $198 million third-quarter loss after strengthening reserves in light of rising claims, says the merger of the two companies will create at least $150 million in “synergies.” Fidelity sees opportunities to cut costs and boost efficiency by eliminating redundancies in corporate and administrative overhead, direct and agency operations, and claims management and processing.
In a conference call with investors, FNF Chairman William Foley signaled that both companies might see layoffs.
“We have our own synergies we have to take a hard look at, because it’s not just a merger of LFG into FNF, and LFG employees and systems are discarded,” Foley said. “We’re basically going to take the best of both companies and end up with a much stronger organization at the end of the day.”
The deal is expected to close by the end of February or March, Foley said, and “We do expect to realize these synergies, a good piece of the synergies, upon the consummation of the transaction.”
Both companies have already downsized considerably during the downturn. In announcing a $50 million second-quarter loss in July, LandAmerica said it had laid off 3,600 employees in the last 12 months. Fidelity recently reported closing 115 title and escrow offices during the third quarter and laying off 1,000 workers.
Antitrust issues
Based on Fidelity’s 26 percent market share in 2007 and LandAmerica’s 19 percent share, the combined companies could end up with 45 percent of the U.S. title insurance market. The nation’s biggest title insurer, First American Corp., enjoyed a 30 percent market share in 2007. If Fidelity’s plan to acquire LandAmerica is consummated, the nation’s two biggest title insurance companies would control approximately 75 percent of the title insurance business.
That might raise the concern of antitrust regulators. Fidelity is instituting a 10 to 20 percent increase in rates across the country, and the proposed merger doesn’t change those plans, Foley said.
But Foley said antitrust review of consolidation in the title insurance industry generally centers around the control of real estate information and data at the county-by-county level.
“In the case of LandAmerica, they’re actually a user of FirstAmerican’s title records system, and only a small percentage (of the companies subsidiaries have their own) title plants,” Foley said. “That being the case, and if the (Federal Trade Commission) is consistent (with) past approaches to this kind of transaction, we don’t anticipate an antitrust issue.”
LandAmerica shareholders, who would receive 0.993 shares of Fidelity common stock for each LandAmerica share they own, must also sign off on the deal.
Last year, one of LandAmerica’s biggest shareholders, Viking Global Performance LLC, urged the company’s board of directors to explore the sale of the company, claiming that the synergies resulting from a merger with a larger competitor could exceed $200 million (see story).
Although LandAmerica’s board was cool to the idea at the time, the continuing credit crunch and worsening economy may now have given the company little choice in the matter.
Fidelity said its title insurance subsidiaries will provide liquidity to LandAmerica equal to the statutory book value of LandAmerica’s two primary title insurance subsidiaries, Commonwealth Land Title Insurance Co. and Lawyers Title Insurance Corp. The money will be used to repay debt LandAmerica owes under a revolving credit facility and private placement of senior notes, the companies said.
Fidelity believes that the merger may allow it to pay down some of its own debt, reducing the combined debt of the companies by $250 million and allowing Fidelity to maintain its current debt-to-capitalization ratio of 30 percent. Fidelity subsidiary Chicago Tile Insurance Co. will also provide a $30 million secured credit facility to LandAmerica.
“The unprecedented credit freeze and depressed real estate market have negatively impacted our business to the point that it has become increasingly difficult for LandAmerica to remain an independent public company,” LandAmerica Chairman and CEO Theodore Chandler said in a statement.
The merger agreement also gives Fidelity until Nov. 21 to conduct a due diligence review of LandAmerica’s books. If Fidelity unearths any surprises that weren’t disclosed during the merger negotiations, the company might back out of the deal.
Foley said the negotiations were held in the course of a few days, and that Fidelity “just didn’t have time to go in” and do the customary due diligence.
“The intention is not to find a reason to not do the transaction,” Foley said. “The intention is simply to validate what we believe we already know about LandAmerica and its systems and its people, and we’re very hopeful the due diligence period will simply expire as a matter of course and the transaction will be firmed up.”
