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- 2013 - October - 28th -
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Fidelity-LPS deal on track, but could change

by Mark Basch, Contributing Writer

Fidelity National Financial Inc. said last week that it remains on track to close its acquisition of Lender Processing Services Inc. late this year or in January, but the terms of the deal are changing again.

During its quarterly conference call to discuss earnings, Fidelity CEO George Scanlon said the company will increase the amount of cash and decrease the amount of Fidelity stock issued to LPS shareholders in the deal.

"We believe that increasing the cash portion of the consideration provides more certainty of value to the LPS shareholders and also reduces the variability of the cost of the acquisition, due to potential volatility in FNF's stock price between now and closing," he said.

Fidelity agreed to buy LPS for $33.25 a share in a combination of cash and stock, but the mix of cash and stock keeps changing.

When the two Jacksonville-based companies first announced their $2.9 billion merger agreement in May, Fidelity said it would pay half of the price in cash and half in stock. A month later, the mix was adjusted to two-thirds cash and one-third in stock.

Scanlon did not say what the mix will be during Wednesday's conference call. However, in a news release and Securities and Exchange Commission filing Friday, LPS indicated that the new terms will give its shareholders more than 80 percent of the purchase price in cash.

The deal is now structured so that LPS stockholders will receive $28.102 in cash for each of their shares. They will also get about one share of Fidelity stock for every five LPS shares they own but that could be changed again, depending on the market price of Fidelity's stock when the deal closes.

Fidelity also announced last week that Thomas H. Lee Partners L.P. is increasing its investment in the deal.

The original agreement called for Thomas H. Lee to make an investment and end up with a 19 percent stake in LPS' business. That was increased to 29 percent when the deal was revised in June.

Under the new structure, Fidelity will acquire 100 percent of LPS and merge it with a Fidelity subsidiary called ServiceLink into a new company called Black Knight Financial Services Inc.

Thomas H. Lee will then acquire 35 percent of Black Knight, with Fidelity retaining 65 percent.

It's all very confusing but the bottom line is, LPS shareholders will get more cash in the deal and Thomas H. Lee is increasing its investment in the business.

To raise the cash for the acquisition, Fidelity also last week announced the sale of 17.25 million new shares of stock at $26.75 a share.

Scanlon said those are shares that would have been issued to LPS stockholders anyway if the terms of the deal remained the same.

"Think of it as a substitution of selling shares now versus waiting until closing and using them in the purchase," he said.

Fidelity earnings rise

Meanwhile, Fidelity reported adjusted earnings of 50 cents a share in the third quarter, down from adjusted earnings of 65 cents a year earlier but a penny higher than the average forecast of analysts surveyed by Thomson Financial.

The company's core business, title insurance, increased earnings in the quarter as its business mix changed.

"The market has made a noticeable shift to a purchase-dominated market, as the level of refinance activity has come down dramatically," Scanlon said.

Because of the reduced activity, Fidelity has cut a total of 1,950 jobs in its field operations since June, including 300 this month, Scanlon said. Dan Murphy, senior vice president and treasurer of Fidelity, said none of those cuts were in Jacksonville.

Fidelity also announced it is increasing its quarterly dividend from 16 cents per share to 18 cents. "We are excited about the future prospects of our company and hope the market sees this dividend increase as a statement of that optimism for the future of FNF," Scanlon said.

Fidelity's stock opened 74 cents higher at a 52-week high of $27.26 Thursday morning after the late Wednesday announcements, but Janney Capital Markets analyst Ryan Byrnes said he is maintaining a "neutral" rating on the stock.

"While we are impressed by management's track record of creating value, we currently believe that shares are appropriately valued at this level according to our sum of the parts valuation. We also believe that the proposed LPS transaction will make FNF more leveraged to the refinance and default market than peers," Byrnes said in a research note.

LPS reports lower earnings

LPS last week reported adjusted third-quarter earnings of 51 cents a share, down from 71 cents a year earlier.

LPS, which provides technology services for mortgage lenders, said its business is also feeling the impact of the shift in the mortgage market.

"We are rigorously managing expenses to mitigate the impact of the sharp decline in origination and default services transaction volumes as we have in prior market cycles," Chief Financial Officer Tom Schilling said in a news release.

Because of the pending acquisition by Fidelity, LPS did not hold a conference call with analysts to discuss its results.

Landstar stock drops

Landstar System Inc.'s stock dropped $2.90 to $54.97 Thursday after the Jacksonville-based trucking company reported lower-than-expected third-quarter earnings.

Chairman and CEO Henry Gerkens had already reduced the company's earnings forecast during his mid-quarter conference call update in late August, but the actual earnings for the quarter came in even lower than that.

Landstar earned 64 cents a share in the quarter, down from 71 cents a year ago and lower than the company's forecast range of 67 cents to 70 cents.

"The primary reason for the earnings miss was due to an unanticipated increase in insurance and claims expense," Gerkens said in Landstar's conference call with analysts.

Landstar also forecast fourth-quarter earnings of 62 cents to 70 cents a share, which is lower than the average analysts' forecast of 72 cents, according to Thomson.

Gerkens said economic uncertainty is making the fourth-quarter forecast difficult.

"I don't see any indication that U.S. industrial output will significantly improve in the near term. Nor do I see any near-term significant improvement in the overall U.S. economic condition. At this point, my best guess is that economic conditions will improve but only at a very, very, very slow pace," he said.

"In my opinion, there remains much economic uncertainty," he said.

Wells Fargo Securities analyst Anthony Gallo said after the earnings report that he remains cautious on the stock with a "market perform" rating.

"Despite the appeal of the business model, we remain on the sidelines at this point of the cycle as customer end markets, particularly machinery and military, continue to soften with lack of clarity on any near-term improvement," Gallo said in his research note.

Gerkens made a point in the conference call of saying the company's fourth-quarter projections do not include the impact of any potential acquisitions or divestitures. That started some speculation that there may be deals in the works.

"We believe the company could look into divesting its TMS (transportation management systems) business, which has not taken off," Stifel, Nicolaus & Co. analyst John Larkin said in a research report.

"Regarding acquisitions, it appears that the company may be looking to put some of its cash to work soon as it repurchased no shares during the quarter and grew its cash/short-term balance sequentially by $30 million," he said.

Rayonier falls after miss

Rayonier Inc. dropped $3.52 to $54.96 Thursday after reporting lower-than-expected earnings.

Third-quarter earnings of 44 cents a share were 18 cents lower than the third quarter of 2012 and 2 cents lower than the average forecast, according to Thomson.

In its conference call, Chairman and CEO Paul Boynton said the company's forest resources business is benefiting from an improved housing market and its real estate business is also benefiting from a better economic outlook.

However, Rayonier's biggest business, performance fibers, reported lower sales due to several factors, including the impact of a "cellulose specialty expansion" project at its mill in Jesup, Ga.

Boynton said the start-up costs from the conversion project will be worth it.

"We continue to believe that the extended capacity of high purity, technically demanding cellulose specialties from the CSE project strategically positions our performance fibers business for long-term growth and profitability. We are fully focused on this unique potential, creating what is truly a specialty chemicals business," he said.

D.A. Davidson & Co. analyst Steven Chercover was not concerned about the third-quarter results, maintaining a "buy" rating on the stock.

"Rayonier shares reacted negatively to commentary that the incremental capacity at Jesup may not be sold out until 2017-18 (versus 2016) and price negotiations for 2014 will be more spirited than in recent years," Chercover said in his report.

"Specialty cellulose prices have not always gone up and to the right, and we applaud Rayonier for getting in front of the issue. The Jesup project was a sound strategic move, which will pay off in the not-too-distant future, and any transitory impact on the segment should be offset by the cyclical recovery in timber and real estate," he said.

McKesson announces next big deal

After completing the acquisition of Jacksonville-based PSS World Medical Inc. this year, McKesson Corp. last week agreed to its next big deal: an $8.3 billion buyout of German pharmaceutical distributor Celesio AG.

The announcement was not a surprise, as Wall Street had been speculating about a possible deal between San Francisco-based McKesson and Celesio for the past three weeks.

McKesson said the combined company will be one of the world's largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector.

McKesson also last week said its adjusted earnings for the second quarter ended Sept. 30 rose 19 percent to $2.27 a share, helped by the PSS deal.

In the company's conference call, Chairman and CEO John Hammergren said McKesson is making "good progress" integrating PSS' operations.

Coach drops on weak sales

On a day that the Standard & Poor's 500 index reached another new high, Coach Inc. was one of the worst performers in the index Tuesday after reporting disappointing sales.

The handbag and fashion accessories company, which has a major distribution center in Jacksonville, reported earnings of 77 cents a share in the first quarter ended Sept. 28, even with last year and a penny higher than the average analysts' forecast, according to Thomson.

However, Coach also said total North American sales fell 1 percent in the quarter to $778 million and comparable-store sales — sales at stores open for more than one year — dropped 6.8 percent.

Coach's stock fell $4.08 to $50.10 Tuesday, a 7.5 percent drop that was the second-worst among S&P 500 stocks behind a 9.2 percent decline for Netflix Inc.

Netflix fell on news that billionaire Carl Icahn was reducing his stake in the company.

Coach fell further to $48.55 Wednesday as three analysts downgraded their ratings on the stock from "buy" to the equivalent "hold."

Northrop jumps to new highs

Northrop Grumman Corp.'s stock jumped to new highs last week after reporting earnings well above analysts' expectation.

The defense contractor, which has a major aircraft facility in St. Augustine, said third-quarter earnings rose 8 percent to $497 million, or $2.14 a share. The average analysts' forecast was $1.82, according to Thomson.

Northrop also raised its earnings forecast for the full year from a range of $7.60 to $7.80 per share to a range of $8 to $8.15.

Northrop's stock rose $4.10 to $105.56 Wednesday after the report and rose another $1.92 to $107.48 Thursday.

mbasch@baileypub.com

(904) 356-2466

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