Analysts react after Fidelity abandons Stewart acquisition

They say abandoning the merger will be positive for Fidelity as it deploys the excess cash in possible share repurchases.

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  • | 5:20 a.m. September 12, 2019
Fidelity National Financial Inc.’s plan to acquire Stewart Information Services Corp. was opposed by the U.S. Federal Trade Commission.
Fidelity National Financial Inc.’s plan to acquire Stewart Information Services Corp. was opposed by the U.S. Federal Trade Commission.
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To no one’s surprise, Fidelity National Financial Inc. and Stewart Information Services Corp. agreed Tuesday morning to abandon their proposed merger, after the U.S. Federal Trade Commission voted Friday to oppose the deal.

The FTC expressed concerns the merger would lessen competition in the title insurance industry.

Jacksonville-based Fidelity already is the dominant company in the title industry with 32% percent of the market, and the addition of Houston-based Stewart would have increased its market share to 43%, the FTC said.

Before Tuesday’s announcement, analysts said they expected Fidelity to abandon the $1.2 billion agreement reached in March 2018. Fidelity spent months trying to satisfy the FTC’s antitrust concerns.

“As of now, we do not believe that the company intends to pursue the transaction any further as we did sense some level of ‘fatigue’ in prior conversations with the company,” Susquehanna Financial Group analyst Jack Micenko said in a research note.

“After nearly 1.5 years of waiting for the FTC vote, we believe FNF will likely move on from Stewart,” Piper Jaffray analyst Jason Deleeuw wrote in his note.

“This was a disappointing outcome, but one the market expected given Stewart’s shares have been trading at a massive discount to the proposed acquisition price,” he said.

Fidelity agreed to buy Stewart for a combination of cash and stock valued at $50.20 per Stewart share.

Stewart’s stock traded in the mid-$40s last year after the deal was announced but dropped to the mid-$30s recently as the regulatory process dragged on. It fell $2.52 to $33.65 Friday after the FTC’s announcement.

Fidelity’s stock has been trading at record high levels recently and barely moved after the FTC decision. Analysts expect the company to find alternate uses for the cash it would be paying to buy Stewart.

“While the Stewart deal would likely have been the best/most accretive route for FNF, we continue to believe that there is a quality consolation prize in the form of ramped buybacks, a higher dividend and a return to tuck-in M&A (which is usually highly accretive in and of itself),” Stephens analyst John Campbell said in his note.

“We reiterate our overweight rating and $49 price target,” he said, with the stock trading at $44.79 at the time of his report.

While the market was betting on the deal falling apart, Micenko admitted he was surprised by the FTC decision.

“We got it wrong; we were in the ‘it gets done camp’ as we thought residential title insurance (about 80% of title revenue) was going to be a bigger hurdle than the commercial business (about 20% of title revenue) for the deal to go through,” he said.

“However, it was the commercial business that ultimately led to the denial as the FTC believes the reduced competition could lead to higher prices for larger commercial transactions.”

Micenko also believes abandoning the merger will be positive for Fidelity as it deploys the excess cash in possible share repurchases, so he raised his price target for the stock from $49 to $51.

“Our thesis on FNF remains unchanged as the overhang from the announcement has now been lifted,” he said. 

Fidelity said it will pay Stewart a $50 million termination fee as part of its agreement.

Stewart, which was preparing to be swallowed up by Fidelity for the past 18 months, named a new CEO on Tuesday after the breakup. Frederick Eppinger, former CEO of The Hanover Insurance Group and a member of Stewart’s board, will run the company.

“While we were disappointed with the FTC’s decision regarding Stewart’s combination with Fidelity, we are well-positioned to execute on a standalone strategic plan built around growth and profitability,” Stewart Chairman Thomas Apel said in a news release.

Drone Aviation CEO Nussbaum dies

Drone Aviation Holding Corp. last week announced Chairman and CEO Jay Nussbaum died Aug. 31.

The Jacksonville-based company, which produces tethered aerial monitoring and communications platforms, appointed President Dan Erdberg to succeed Nussbaum as CEO. Erdberg has been president since October 2015.

David Aguilar, a member of Drone Aviation’s board, was appointed chairman.

Nussbaum, 75, had been chief executive since April 2016.

“Jay was committed to building a business that would empower people and enterprises to harness the potential of our tethered drone technology. Our growing deployments with customers, including the U.S. Border Patrol and the U.S. Army, are testaments to both his vision and focus,” Erdberg said in a news release.

St. Joe moving headquarters again

The St. Joe Co., which moved its headquarters from Jacksonville to Watersound in the Florida Panhandle in 2010, is moving again. But it’s not going far this time.

The real estate development company last week said it will relocate in mid-2020 to an office park it owns in Panama City Beach.

St. Joe said it has 12 projects under development in Bay County, including eight in Panama City Beach, and the move puts it closer to “key” projects.

St. Joe was an industrial conglomerate consisting of businesses accumulated by the estate of Alfred I. duPont. But it began selling off its industrial properties in the 1990s to focus on developing its large landholdings, which were mainly in the Panhandle. 

That prompted the move to Watersound, a community St. Joe developed west of Panama City.

Rayonier AM suspends dividend

After losing money in the first two quarters of 2019, Rayonier Advanced Materials Inc. said Friday its board of directors decided to suspend cash dividend payments on its common stock.

“The board and management believe this is a prudent decision to optimize financial flexibility in uncertain economic times and is in the best interest of all of the company’s stakeholders,” CEO Paul Boynton said in a news release.

“This allows the company to redeploy approximately $18 million of cash annually to essential operating needs and debt obligations,” he said.

The Jacksonville-based maker of cellulose specialties products recorded net losses totaling $37 million in the first six months of this year, citing price declines for commodity products.

The company said it was renegotiating loan agreements because its losses would likely result in a breach of two covenants by the end of the third quarter.

Rayonier AM was paying 7 cents a share in quarterly dividends, with payments totaling $8.6 million in the first two quarters this year. It still had about $90 million in cash on its balance sheet as of June 29.

The company’s stock fell to a record low last month after reporting its second-quarter loss, and Wall Street was not surprised to see the dividend cut.

The stock open 64 cents lower at $3.20 Monday after the late Friday announcement but rebounded to close at $3.96, up 12 cents on the day.

Coach parent replaces CEO

Tapestry Inc., which fell to a 10-year low last month after a disappointing earnings report, replaced its chief executive officer last week.

The parent company of lifestyle brands Coach, Kate Spade and Stuart Weitzman said Victor Luis left after five years as CEO and was replaced by Jide Zeitlin, chairman of the company’s board of directors.

Zeitlin, who joined Tapestry’s board in 2006, has a background in investment banking, including 20 years at Goldman Sachs.

Coach’s stock rose $3.36 to $23.69 last week after the announcement. It dropped as low as $18.54 in August.

New York-based Tapestry operates an 850,000-square-foot facility at the Jacksonville International Tradeport in North Jacksonville that handles all of Coach’s North American distribution.