STC - Stewart Information Services

[writser]

Wondering if anyone has an opinion on this. Stewart is a real estate services company to be taken over by Fidelity National Financial. The merger consideration is $25 and 0.6425 shares of FNF, which works out to a current value of $50.22 vs. a stock price of $44.78 or a 12% spread. Of course there are some caveats. FNF will adjust the merger price downwards on a sliding scale in case the combined company is required to divest assets generating revenues over $75m, subject to a cap of $225m. Worst case the merger consideration will be adjusted by $4.50 (i.e. you will receive $22.75 and 0.5847 shares of FNF instead). The past year STC generated $1.96b in revenue - so the worst case scenario happens in case they have to shred off businesses generating ~10% of revenue. I don't pretend to have any special insights regarding the size of possible divestitures regulators would require but 10% doesn't seem completely impossible. The good thing: STC is currently priced at a 2% discount to the worst case scenario. The deal is expected to close in Q1 or Q2 2019. End date is March 18 but can be extended twice. Assuming a close in April you are looking at an expected 2% - 12% return in ~6 months. A few random notes:

 

- There's a cheap borrow on FNF and both FNF and STC pay a similar dividend. Hedging isn't too expensive.

- FNF has to pay a hefty $50m termination fee if they don't get regulatory approval

- STC low of the last few years is around $30. Doesn't seems like a complete disaster if the deal falls apart.

- Shareholders already approved the deal.

- Deal already received Canadian antitrust clearance (not sure how relevant that is).

- Despite STC having a $1b market cap this deal seems relatively low-key (not much information out there on SeekingAlpha, etc.)

- Deal doesn't seem super large to me but I don't know how competitive the markets are in which they are operating. Given how the deal is structured it seems like regulatory risks are perceived to be real.

 

Basically you are making a bet on regulators being lenient (and fast). That's usually not something I'm a big fan of but it seems the market likes the uncertainty even less (or is better informed than me .. ). Looks like a 2% - 12% return in 6 - 9 months which is reasonable but not fantastic. Downside seems limited given the undisturbed stock price and the juicy termination fee. I haven't reached a verdict yet. Probably going to buy a few shares just to follow the story but not sure if I want a bigger position.

 

As always, any insights are appreciated. I might be completely out of my depth here with respect to handicapping regulatory issues.

[Guest Schwab711]

I think this takes FNF to 50% market share, more than FAF and ORI combined.

[writser]

This summer's investor presentation contains updated market share charts (page 6). I'm no expert on title insurance but yeah, seems like the combined entity would have a huge market share. Given that FNF explicitly states they pay a $50m termination fee in case regulators block the deal they must have some confidence in a good outcome but STC shredding off 10% of revenue doesn't seem unlikely. At current prices this deal is probably low-risk but has a low expected IRR as well. I'm on the sidelines for now.