BANGALORE (Reuters) - Fidelity National Financial Inc (FNF.N), one of the largest U.S. title insurers, agreed to buy smaller rival LandAmerica LFG.N for about $126 million in stock as the title insurers seek to consolidate amid an industry slump triggered by a worsening housing crisis.
LandAmerica shares, beaten down by heavy losses in the recent past, soared as much as 104 percent Friday, to trade at a significant premium to the price offered by Fidelity.
Fidelity National shares rose as much as 33 percent.
“They (Fidelity) are taking out the third-biggest competitor in the industry basically for the price of its debt, a very inexpensive trade for Fidelity..,” RBC Capital Markets analyst Mark Dwelle told Reuters.
Fidelity National will continue paying its current dividend of 60 cents a share annually through 2009, a company official said in a conference call with analysts.
The company expects the deal to close by March 31, 2009, it said in the call.
“There is nothing from a financing standpoint and approval standpoint that I think could be a serious roadblock,” Dwelle said, but added gaining regulatory approval for so much of market share will be minor issue for the companies.
Shareholders of LandAmerica Financial Group, the No.3 title insurer, will receive 0.993 shares of Fidelity common stock for each share held, the companies said in a statement.
The deal represents a premium of about 74.5 percent based on LandAmerica’s closing price of $4.75 on Thursday. LandAmerica had 15.2 million outstanding shares as of July 30, 2008.
“The unprecedented credit freeze and depressed real estate market have negatively impacted our business to the point that it has become increasingly difficult for LandAmerica to remain an independent public company,” LandAmerica’s Chief Executive Theodore Chandler said.
As LandAmerica shares were trading around $8 just two days back, the premium is the more likely to be the difference between that and the new offered price, Dwelle said.
Glen Allen, Virginia-based LandAmerica on Wednesday postponed the release of its third-quarter results sending its shares down as much as 35 percent on Thursday.
For Fidelity, investors quite liked the value of the deal that they managed, he added.
The companies will regain their place as big players in the title insurance base when real estate markets stable down, Dwelle said. “Probably real estate markets will be in a better position by the time this deal gets closed.”
It is a very good deal for the whole title insurance industry as consolidation of one big player opens up opportunities for the rest, the analyst said and added only four big companies including Fidelity and LandAmerica occupy about 85 percent of the whole market.
Shares of other title insurers also soared on Friday on the proposed merger. Shares of First American Corp (FAF.N) rose as much as 18 percent while those of Stewart Title Guaranty Co (STC.N) rose 7 percent.
Title insurers, who protects home buyers and lenders against claims and legal fees should a dispute over ownership arise, have taken a hit as the worsening housing crisis resulted in lower demand for and lower prices on homes, cutting into their revenue.
Most of the companies, including Fidelity National and LandAmerica have taken drastic steps like cutting jobs and slashing dividends to curb losses.
Jacksonville, Florida-based Fidelity National posted a $198.3 million third-quarter loss in October, after setting aside $261.6 million in reserves. It also halved its dividend and announced 1,000 job cuts and an across-the-board 10 percent pay cut.
In July, LandAmerica posted a wider-than-expected quarterly loss and slashed its dividend by 83 percent.
“Land America was clearly in some difficulties and I think this is best solution for shareholders compared to seeing their equity getting eroded away,” Dwelle said.
He has a “sector perform” rating on the stock of LandAmerica and an “outperform” rating on Fidelity.
The deal will reduce the combined debt of the companies by about $250 million before the merger closes. Fidelity, however, does not expect any material change from its current debt to total capitalization ratio of about 30 percent.
Fidelity estimates about $150 million in operational cost synergies throughout the combined operations, Chairman William Foley said.
Shares of LandAmerica were trading up 82 percent at $8.65 while Fidelity National was up 23.4 percent at $10.31. Through Thursday, LandAmerica shares had fallen more than 85 percent year-to-date while Fidelity National is down 43 percent.
Editing by Dinesh Nair