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Basch Report
Jax Daily Record Monday, Mar. 26, 201806:30 AM EST

Fidelity expands title industry dominance

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The $1.2 million acquisition of Houston company could take nine months.
by: Mark Basch Contributing Writer

Fidelity National Financial Inc. last week announced an acquisition that will expand its dominance of the title insurance industry, but also face intense regulatory scrutiny.

The $1.2 billion agreement to buy Houston-based Stewart Information Services Corp. includes provisions that could reduce the price based on divestitures needed to gain antitrust approval.

Piper Jaffray analyst Jason Deleeuw said in a research note that Jacksonville-based Fidelity had about 32 percent of U.S. title insurance premiums in 2017, and Stewart accounted for another 10 percent.

Bill Foley

Fidelity reported total revenue of $7.7 billion last year, while Stewart had nearly $2 billion.

In a conference call with analysts to discuss the merger, Fidelity Chairman Bill Foley said he expects the regulatory approval process to take nine months to a year before the merger can be completed.

The agreement calls for Fidelity to pay $50 per Stewart share, with half of the price in cash and half in Fidelity stock.

However, the price will be reduced if the merged company is required to divest businesses producing $75 million or more in annual revenue. Based on the amount of revenue lost, the value of the deal can drop as low as $45.50 per Stewart share.

“There is some revenue we will lose and we recognize that,” Foley said.

He also said working out those details made for “an intense negotiation” with Stewart.

Regulators will not be looking at the company’s national market share, which would exceed 40 percent, Deleeuw said in his report.

“Historically, regulatory focus has been on access to title plant data and information concentration by county,” he said.

“Fidelity has analyzed its title plant share by county relative to Stewart and believes it could be required to divest certain businesses depending on regulatory guidelines.”

Wall Street seems to expect the purchase price to be lowered. Stewart’s stock was listed at $40.72 before last Monday’s merger announcement and rose to a high of only $45.07 last week.

Stewart has been looking for a buyer, announcing last fall that its board of directors was considering possible strategic alternatives.

The previous year, the company came under pressure from activist hedge fund Starboard Value LP, which resulted in the appointment of four new directors to Stewart’s board.

“Last year, our board initiated a review of strategic alternatives for the company, and after an extensive process, we determined that capitalizing on the Fidelity platform will best enable us to support the Stewart brand and continue providing the service our customers have come to expect,” Stewart Chairman Thomas Apel said in a news release.

“At the end of the day, we were the best acquirer for them,” Foley said.

“We could probably have paid a bit more than some other acquirers because of the synergy potential and our knowledge of the industry and business,” he said.

Fidelity expects the merged company to achieve at least $135 million in annual cost savings and increase its annual earnings per share by at least 15 percent.

“We note that there are still a lot of risks to the closure of the acquisition given the likely required divestitures for regulatory approval,” Barclays analyst Mark DeVries said in a research note.

“But on balance, it is a positive announcement for Fidelity given the accretion, even with the premium paid, from the operating leverage the company should be able to generate,” he said.

“Based on previous acquisitions, we point out that management tends to be conservative around their cost synergy targets and has historically delivered above their initial target, so there is potential upside.”

FRP selling properties for $359 million

FRP Holdings Inc. announced an agreement Thursday to sell a portfolio of 41 industrial warehouses and two adjacent lots for $358.9 million to an affiliate of Blackstone Real Estate Partners.

John Baker

Most of the properties are in Maryland, with others in Virginia and Delaware.

“The reduction in corporate income tax rates in a low cap rate environment created too good an opportunity to forgo,” FRP Chief Executive John Baker said in a news release.

Jacksonville-based FRP had been considering a conversion to a real estate investment trust before the new federal tax law made a conversion less desirable.

Baker said FRP will redeploy the proceeds from the sale into other businesses that are producing more favorable returns, including a mixed-use riverfront development project ongoing in Washington, D.C.

The sale to Blackstone will require approval of FRP shareholders, the company said.

TapImmune gets analyst’s attention

From an investing standpoint, it is difficult for most of us to evaluate a company like TapImmune Inc., a pharmaceutical research company developing immunotherapies to treat cancers, including ovarian and breast cancer.

The Jacksonville-based company has several clinical trials underway but could be years away from actually having products on the market producing revenue. 

The company recently announced results from a Phase 1 trial of a vaccine called TPIV200 to treat ovarian and breast cancer, and a study of the results was enough to attract the attention of one analyst.

Steve Brozak of WBB Securities initiated coverage of TapImmune with a “speculative buy” rating.

“We are initiating coverage of TapImmune based on the successful execution of the company’s strategy as apparent by this most recent data readout, recognition by the clinical community, its future revenue drivers, and its continued clinical development path progress,” Brozak said in his report.

“We have gained interest in TapImmune due to the position it is establishing in the grim field of ovarian cancer,” he said.

“While not a primary endpoint, the company attained the attention of clinicians and researchers at such an early stage. We believe this clinical data is a promising foundation and will continue to monitor its progress, especially since we are now anticipating similar efficacy data in the ongoing Phase 2 trial of TPIV200.”

Brozak set a 12-month price target of $5.50 for TapImmune’s stock, which was trading at $3.67 at the time of his report.

ADT drops again

ADT Inc.’s initial public offering in January was a dud, and the security company’s stock fell even further after its first financial report since the IPO.

ADT reported an adjusted net loss of $37 million, or 6 cents a share, for the fourth quarter, surprising investors who were expecting a profit.

For all of 2017, ADT’s revenue rose 4 percent to $4.3 billion, while the company had an adjusted net loss of $222 million, or 35 cents a share.

The company is projecting 2018 revenue to increase to a range of $4.45 billion to $4.55 billion. It didn’t give a forecast for net income but projected adjusted earnings before interest, taxes, depreciation and amortization to be between $2.415 billion and $2.435 billion, up from $2.353 billion in 2017.

ADT went public in January for the second time in about five years, after a private equity buyout in 2016. The company was hoping to sell its shares at $17 to $19 each but when the IPO hit the market in mid-January, the offering price was lowered to $14.

The stock dropped even lower on its first day of trading, closing at $12.39, and the stock continued to fall over the next two months.

It was trading at $10.21 before the March 15 financial report, which sent the stock tumbling again. It dropped to a low of $8.02 Friday.

Boca Raton-based ADT is one of Jacksonville’s largest employers with more than 3,000 workers. The company employs about 18,000 people overall.

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