LPS Deal Would Finish Round Trip With Shares at No Gain
Lender Processing Services Inc. (LPS), the company said to be in talks to sell itself to its former owner, could leave shareholders where they started in 2008 if the mortgage-services provider completes its round-trip journey.
Title insurer Fidelity National Financial Inc. (FNF) is in talks to buy 80 percent of LPS in a $2.9 billion deal that values the target at $33 a share, a person familiar with the matter said. Thomas H. Lee Partners would take a 20 percent stake, said the person, who asked not to be identified because the talks aren’t public.
Fidelity National reorganized in 2006, splitting off a business called Fidelity National Information Services Inc. (FIS) In July 2008, that business gave investors half a share of LPS common stock for each Fidelity National Information share they owned. The shares closed at $33 on July 2, 2008, the day of the spinoff. All three companies are located at the same address in Jacksonville, Florida.
“Do the businesses make sense together? I think you can make the case,” Brett Horn, an analyst at Morningstar Inc., said yesterday by phone. “But if the businesses make sense together, why did you separate them in the first place?”
LPS rose 13 percent yesterday to $32.88, the highest close in more than two years. Fidelity National Financial advanced 5.7 percent to $25.75, the biggest gain since August 2011.
LPS would operate as a subsidiary of Fidelity National Financial, the person said. LPS has technology that’s used by lenders throughout the mortgage process, from origination to foreclosure, and may benefit from helping banks cut expenses tied to home loans, said Mark Palmer, an analyst at BTIG LLC.
“Instead of paper and people, which historically had been the way the mortgage business was conducted, LPS provides a technological solution that can help the banks save money,” Palmer said by phone. “LPS looks to me like a very attractive buyout candidate, if not a textbook LBO, given the company’s consistently strong free cash flow” and low debt levels.
The company can benefit from an improving housing market, Palmer said. LPS says its technology is used by lenders to handle about 50 percent of all U.S. mortgages by dollar value.
The firm’s biggest customer is Wells Fargo & Co., the No. 1 U.S. mortgage lender, which accounted for 21 percent of revenue last year, according to an LPS regulatory filing. JPMorgan Chase & Co., the biggest U.S. bank, was the second-largest customer and accounted for 15 percent of revenue.
Still, LPS may face headwinds because much of its growth has been tied to a surge in delinquent home loans after the housing bubble burst, Horn said. He estimates LPS shares have a fair value of $28, excluding the effect of a potential deal.
“During the crisis they actually were doing very, very well,” he said. “They lost on the origination side, but they gained a lot on the default side. It’s tough, because default got so big for them during the crisis.”
Title insurers like Fidelity National Financial and First American Financial Corp. use their records and public documents to verify a seller is a property’s true owner and that it is free from liens. The companies collect a premium at the closing of the purchase and pay costs that may arise if someone disputes the new owner’s right to the property.
Fidelity National Financial Chief Executive Officer George Scanlon said in an interview last year that his company was expanding in new directions after selling some insurance operations at a profit. The company divested stakes in units including a flood insurer and a property-casualty business.
“We’re taking that capital, keeping it as dry powder,” Scanlon said then.
The insurer has invested in businesses ranging from restaurants to auto parts. It announced an agreement in 2012 to buy J. Alexander’s Corp. and take its dining unit public in a deal valued at $72 million. It also agreed to buy restaurant chain O’Charley’s Inc., valuing the target company at more than $200 million.
Thomas H. Lee has been involved with the companies before. In 2005, an investment group led by Thomas H. Lee and Texas Pacific Group purchased a 25 percent stake in Fidelity National Information, according to a statement on Thomas H. Lee’s website.