By Jack Lee, Ryan Chan, Heather Leung and Terry Au-Yeung (HKUST), Friedrich von Storch, Enrique Pérez-Hernández and Ties Oudmayer (IE University)
Photo: Étienne Beauregard-Riverin (Unsplash)
Overview of the deal
Acquirer: Intercontinental Exchange (NYSE: ICE)
Target: Black Knight Financial (NYSE: BKI)
Implied Equity Value: $13.1bn
Total Transaction Size: $16.0bn
Expected closed date: H1 2023
Target advisors: J.P. Morgan (Exclusive Financial Advisor), Watchtell, Lipton, Rosen & Katz (Legal Advisor)
Acquirer advisors: Goldman Sachs, Wells Fargo (Lead Financial Advisors), Shearman & Sterling, Morgan Lewis & Bockius (Legal Advisors)
Global marketplace infrastructure, data services and technology solutions provider Intercontinental Exchange (ICE) has agreed to acquire Black Knight Financial, a software, data and analytics housing finance company for $13.1bn through an 80% cash and 20% stock offer. Similar to its past acquisitions of Simplifile (2019) and Ellie Mae (2020), Intercontinental’s procurement of Black Knight’s technology solutions, data assets, analytics and human capital will further consolidate ICE’s end-to-end electronic workflow solutions. A streamlined mortgage lending process and monthly payments faced by homeowners, among expected improvements in automation and efficiencies are projected to consequent $200mn in cost synergies and $125mn in revenue synergies (net of related costs), both to be fully realised by Year 5.
However, the mortgage origination boom that preceded and encouraged the deal, largely driven by interest rate cuts, has long dissipated since the Fed deployed inflation-combatting rate hikes. With notable originators filing for bankruptcy and rapidly declining employment in the industry, the collapse of the mortgage origination market combined with heightened antitrust scrutiny casts doubts on the deal rationale.
“This transaction will benefit ICE, Black Knight, and our collective shareholders. Black Knight’s high-growth, recurring revenue stream will further complement our 'all weather' business model, while the strength of ICE’s balance sheet, and our combined cash flows, position this transaction to be accretive to adjusted earnings per share in the first full year.” - Warren Gardiner, CFO (Intercontinental Exchange)
Company Details (Acquirer - Intercontinental Exchange)
Intercontinental Exchange, Inc. (ICE) operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. The company owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. This includes ICE futures exchanges in the United States, Canada and Europe, the Liffe futures exchanges in Europe, the New York Stock Exchange, equity options exchanges and OTC energy, credit and equity markets.
Founded in 2000, headquartered in Atlanta, United States
CEO: Jeffrey Sprecher
Number of employees: 8,911 (2022)
Market Cap: $60.1bn (as of 03/02/2023)
EV: $77.1bn
LTM Revenue: $7.3bn
LTM EBITDA: $4.8bn
LTM EV/Revenue: 10.6x
LTM EV/EBITDA: 16.1x
Company Details (Target - Black Knight)
Black Knight, Inc. (NYSE:BKI) is an American company engaged in offering software, data and analytics solutions. Based in Jacksonville, Florida, the firm has around 6,500 employees and serves four main target segments: Real Estate, Mortgage Origination, Mortgage Servicing and Capital and Secondary Markets. Black Knight’s product offerings include software products to assist loan origination, processing and servicing as well as data and analytics tools such as automated valuation models, data integration and risk assessment.
Founded in 2014, headquartered in Jacksonville, Florida
CEO: Joe Nackashi
Number of employees: 6,500
Market Cap: $9.53bn (as of 03/02/2023)
EV: $12.3bn
LTM Revenue: $1.6bn
LTM EBITDA: $0.6bn
LTM EV/Revenue: 7.9x
LTM EV/EBITDA: 19.5x
Projections and Assumptions
Short-term consequences
The acquisition will result in a further technological improvement in the mortgage lending process for ICE, which is part of the deal series since 2016, including Simplifile in 2019 and Ellie Mae in 2020, in order to support its mortgage servicing business. By including Black Knight’s technology solutions, ICE can leverage its cutting-edge mortgage-related data assets, leading analytics, and its team of mortgage and technology professionals to strengthen ICE’s fast-growing mortgage technology business. The proposed acquisition will particularly benefit ICE Mortgage Technology, which is part of ICE and is currently the leading cloud-based loan origination platform provider for the mortgage industry. The mortgage data platform from Black Knight can be immediately used for mortgage loan verification, providing a smoother mortgage lending service to clients while lowering the rate of default using the data analytics technology from Black Knight.
The $13.1bn total market value of the acquisition, via an 80% cash and 20% stock offer, will result in a $10.5bn cash expense, potentially causing short-term cash flow trouble that reduces the working capital of ICE. This problem may alleviate when ICE fully completes the integration of Black Knight’s technology into its own mortgage business to start generating revenue. On the other hand, Warren Gardiner, the CFO at Intercontinental Exchange, is confident that the deal will be financially rewarding in a short period: “Black Knight’s high-growth, recurring revenue stream… while the strength of ICE’s balance sheet, and our combined cash flows, position this transaction to be accretive to adjusted earnings in the first full year.”
Long-term Upsides
Black Knight is the largest player in mortgage technology and, although Intercontinental Exchange is best known for owning the New York Stock Exchange, it has been building a large presence in mortgage technology as well. Therefore, if Black Knight and Intercontinental Exchange merge, the combined company will have exposure to the entire mortgage origination value chain. Hence, the House Financial Services Committee has raised some red flags concerning this deal since the combined company would face little competition which would give them the possibility of raising prices, resulting in bad governance. Therefore, if the deal were to go ahead, it would have a significant impact on consumers in the long run potentially having to face a steep increase in prices. The House Services Committee has recently expressed this concern by sending a letter to the Federal Trade Commission explaining that the combined company will “exert significant market power over loan pricing for consumers, access to and sale of consumer data and mortgage software pricing”.
Moreover, since the deal was announced, the price of Black Knight shares has decreased. Currently, the stock is trading at about $59 per share - well below the announced deal value of $85 per share. This fall in the stock price could be a result of the antitrust issues hovering over this merger. Nevertheless, it will leave Intercontinental worrying whether they are overpaying, which would mean they will not get the maximum return possible from Black Knight in the long run.
Risks and Uncertainties
Back in May, when the deal was announced, combining two of the biggest companies in the mortgage technology industry seemed like a reasoned judgement. Since then, the mortgage origination market has slumped while the government is still raising antitrust issues around the transaction.
Intercontinental Exchange has been making a name for itself in the mortgage technology industry with portfolio companies Ellie Mae, which includes the loan origination system Encompass, and Simplifile, an electronic mortgage registration system. Although these businesses don’t create mortgages, they help construct the mortgage packages which are sold to investors. While Black Knight is primarily known for its loan origination system, Empower, it also owns Optimal Blue, facilitating sellers to price and sell their loans. This would allow Intercontinental Exchange to have access to the full mortgage origination chain, sparking fears of the company raising loan pricing for consumers, which would be passed on to borrowers. The Federal Trade Commission is expected to launch a lawsuit soon, while both companies have engaged bankers on possible divestitures in order to gain FTC approval of the transaction.
Post-pandemic, the mortgage origination industry posted a record year in volumes, courtesy of the Federal Reserve, who at the time cut interest rates to stimulate the US economy. Easy refinance volumes thrived, which in the meantime have virtually vanished once the Fed began hiking rates to combat inflation. The sector is highly cyclical, with several players having filed for bankruptcy in the past 12-months. Hence, the rationale behind the transaction could no longer be of relevance from a financial standpoint. An antitrust lawsuit could serve as an excuse down the line for Intercontinental Exchange to call off the deal.
“Black Knight shares our passion for leveraging technology to serve customers and households, and, with our expertise in operating networks and marketplaces, our planned acquisition will bring to life a true end-to-end solution for the mortgage manufacturing and servicing ecosystem, benefitting aspiring and current homeowners across the United States.” - Jeffrey C. Sprecher, Founder, Chair and CEO (Intercontinental Exchange)