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Intercontinental Exchange and Black Knight Deal Blocked By FTC

Updated: Oct 30, 2023

Acquisition Overview

The Federal Trade Commission (FTC) has announced that it will seek to block the acquisition of Black Knight (BKI), a leader in software development and data analytics in the mortgage and real estate industries, by Intercontinental Exchange (ICE), the financial exchange operator and provider of mortgage technology. The deal was first announced on 4th May 2022, and the proposal consists of a cash-and-stock deal totalling $13.2 bn USD. This is one, in a series, of acquisitions from ICE to support its growing mortgage servicing business, as this has been identified as a source of potential windfall as the sector automates and relies on technology. Opposition has been grounded on claims that the acquisition will lead to higher fees for consumers, less innovation, and fewer choices in the process of financing the purchase homes.

Deal Structure

The $13.2 bn deal is set to be funded part cash, part stock, and financing the rest through bond issues. On 7th March 2023 the merger agreement was amended to value Black Knight at $85 per share - which translates to $11.8 bn market equity value. Consideration will come in the form of $68 per share, and a stock exchange ratio of 0.0682, with Black Knight shareholders being able to choose cash or stock. ICE has announced that it will use the cash process from offering 2025 notes to the value of $1.25 bn, 2027 notes of $1.5 bn, 2029 notes of $1.25, 2033 notes of $1.5 bn, 2052 notes of $1.5 bn, and 2062 notes of $1 bn, along with cash on the balance sheet to finance the remainder of the deal.

Financial Advisors:

  • Goldman Sachs (Intercontinental Exchange)

  • JP Morgan (Black Knight)

Intercontinental Exchange

Intercontinental Exchange was founded in 2000 and is a global provider of data services and technology solutions. ICE employs 8,911 people and offers these services to a wide range of customers including financial institutions, governments, and corporate enterprises. The provision of data and technology is offered over three asset classes: Exchanges, Fixed Income & Data, and Mortgage Technology. The latter refers specifically to the digitization of the US residential mortgage market, to provide greater efficiencies and reduce costs across the entire mortgage process.

Enterprise Value (EV): 72,425.6 (USD mns)

Last Twelve Months (LTM) Revenue: 7,292 (USD mns)

Last Twelve Months (LTM EBITDA): 4,513 (USD mns)

Market Cap: 55,728.6 (USD mns)

Black Knight

Black Knight, founded in 2013 and employing 6,100 people, is a premier provider of integrated software solutions within the US mortgage and real estate market. This allows clients to automate large parts of the business processes along the mortgage process, right from originations, servicing, and default. The company runs two segments, Software Solutions and Data and Analytics. Clients can use Black Knight’s software to apply for not only mortgages, but home equity loans and other lines of credit, then use the data services for property ownership data, automated valuation models, multiple listing services, and other services.

Enterprise Value (EV): 11,314.9 (USD mns)

Last Twelve Months (LTM) Revenue: 1,551.9 (USD mns)

Last Twelve Months (LTM EBITDA): 497.4 (USD mns)

Market Cap: 8,598.1 (USD mns)

Industry Insight

Housing sector has seen steady and consistent expansion over the longer term. For example, the housing stocking has more than doubled since 1970, which tracks roughly in line with population. There has, however, been a decline in homes for sale per capita, which has triggered an uptick in housing starts. House prices are expected to remain higher than pre-pandemic levels, as supply constraints will limit price corrections in some markets, while demand is sustained by household formation, and relatively strong household balance sheets being sustained. The ‘Millennial’ generation is relatively large, in comparison to ‘Generation X’ and ‘Generation Z’, who proceed and will succeed them, and are now coming into prime home ownership age. This suggests there will be an acceleration in home ownership rates over the next decade.

The Mortgage Bankers Association (MBA) does not see the cost-of-living crisis, nor historically high house prices, as a barrier, with their own projections stating that they forecast over $1.8 tn in purchase mortgage originations in 2024. Modest recession expectations have meant that Mortgage rates are expected to fall, but this could bring in younger people who have been traditionally priced out of the market. However, the extent of a fall in house prices will be limited due to a longstanding supply shortage. Inventory, as explained earlier, is increasing, but demand is high and sustained, meaning that house building in the short term will not have a considerable bearing on house prices.

Strategic Rationale

The acquisition of Black Knight will allow ICE to expand considerably in the US mortgage market, consolidating their position as a market leader in this field. Doing so will, ICE says, reduce operational cost, help grow clients’ businesses, and reduce risk. ICE already owns the Mortgage Electronic Registration System (MERS), which keeps track of servicing and ownership data, as well as Ellie Mae who in turn owns one of the big loan origination systems (LOS) called Encompass. The view from inside ICE is that the current system for assembling mortgages is outdated, and in need of a technological revamp. Black Knight then offers the segments that ICE is yet to offer, such as a Mortgage Servicing Platform (MSP).

One suggestion is that ICE could further use its expertise in setting up exchanges to set up a whole-loan exchange. Currently, mortgages must be traded one at a time due to each mortgage being individual in its loan amount, borrower, and credit etc, but there is the prospect of being able to automate trade mortgages on a much larger scale. This must be prefaced with the fact that this is an extremely large project to undertake due to the complexities of bundling mortgages. Perhaps a more likely business rationale is to assert dominance in automating the mortgage process and use the assumption that demand, and demographics will drive huge profits over a sustained period. This will create a reliable source of revenue and offset the cyclicality of earnings seen in the exchange business.

Long Term Prospects

If the deal goes through it is likely to be successful. There is little work needed to be able to offer a complete mortgage solution to clients. Furthermore, the demographics, and historical trend of home ownership age would also suggest that this acquisition is set to give ICE a sustained revenue stream for decades to come. However, there is reason to doubt the optimism touted by both ICE and Black Knight.

The main consideration is that FTC has opened a case against the acquisition, and thus far prevented the deal from closing. The chief concern seems to be that ICE will have too much power in the pricing of mortgage data that lenders then rely on. To try and ease concerns, Black Knight has put its own LOS Empower up for sale in response to antitrust concerns (ICE already has its own LOS - Encompass). The Community Home Lenders Association have forcefully opposed the deal and cite that Empower and Encompass together are the top two vendors for loan origination software. And this would mean that they control upwards of 60% of the market. However, the FTC has stated that, this alone is insufficient to allow the acquisition to go through.

I recently reported that the FTC allowed but is continuing to investigate Amazon’s acquisition of 1Life Healthcare. It does not look as though ICE will be granted this same privilege, and until concerns are eased, the FTC will not allow the acquisition to go through as it is currently stated. This appears to be a key trend in M&A across America - the FTC is unwilling to let any acquisitions that hint at competition reduction to pass without thorough inspection. Considering this I would say that there will certainly be some short-term disruption, and if the FTC can reduce the terms of the deal (a continuation of Black Knight needing to sell parts of its business) then this will feed into a negative impact on the long-term prospects of ICE’s ability to realise the potential gains it has identified.

Written by Max Brewster (Keble College, University of Oxford)

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