Intercontinental Exchange’s $16bn Acquisition of Black Knight
Global marketplace infrastructure, data services and technology solutions provider Intercontinental Exchange (ICE) has agreed to acquire Black Knight Financial, a software, data and analytics housing finance company for $13.1bn through an 80% cash and 20% stock offer. Similar to its past acquisitions of Simplifile (2019) and Ellie Mae (2020), Intercontinental’s procurement of Black Knight’s technology solutions, data assets, analytics and human capital will further consolidate ICE’s end-to-end electronic workflow solutions. A streamlined mortgage lending process and monthly payments faced by homeowners, among expected improvements in automation and efficiencies are projected to consequent $200mn in cost synergies and $125mn in revenue synergies (net of related costs), both to be fully realised by Year 5.
However, the mortgage origination boom that preceded and encouraged the deal, largely driven by interest rate cuts, has long dissipated since the Fed deployed inflation-combatting rate hikes. With notable originators filing for bankruptcy and rapidly declining employment in the industry, the collapse of the mortgage origination market combined with heightened antitrust scrutiny casts doubts on the deal rationale.
“This transaction will benefit ICE, Black Knight, and our collective shareholders. Black Knight’s high-growth, recurring revenue stream will further complement our ‘all weather’ business model, while the strength of ICE’s balance sheet, and our combined cash flows, position this transaction to be accretive to adjusted earnings per share in the first full year.” – Warren Gardiner, CFO (Intercontinental Exchange)
Company Details (Acquirer – Intercontinental Exchange )
Intercontinental Exchange, Inc. (ICE) operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. The company owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. This includes ICE futures exchanges in the United States, Canada and Europe, the Liffe futures exchanges in Europe, the New York Stock Exchange, equity options exchanges and OTC energy, credit and equity markets.
Founded in 2000, headquartered in Atlanta, United States
CEO: Jeffrey Sprecher
Number of employees: 8,911 (2022)
Market Cap: $60.1bn (as of 03/02/2023)
EV: $77.1bn
LTM Revenue: $7.3bn
LTM EBITDA: $4.8bn
LTM EV/Revenue: 10.6x
LTM EV/EBITDA: 16.1x
Company Details (Target – Black Knight )
Black Knight, Inc. (NYSE:BKI) is an American company engaged in offering software, data and analytics solutions. Based in Jacksonville, Florida, the firm has around 6,500 employees and serves four main target segments: Real Estate, Mortgage Origination, Mortgage Servicing and Capital and Secondary Markets. Black Knight’s product offerings include software products to assist loan origination, processing and servicing as well as data and analytics tools such as automated valuation models, data integration and risk assessment.
Founded in 2014, headquartered in Jacksonville, Florida
CEO: Joe Nackashi
Number of employees: 6,500
Market Cap: $9.53bn (as of 03/02/2023)
EV: $12.3bn
LTM Revenue: $1.6bn
LTM EBITDA: $0.6bn
LTM EV/Revenue: 7.9x
LTM EV/EBITDA: 19.5x
Projections and Assumptions
Short-term consequences
The acquisition will result in a further technological improvement in the mortgage lending process for ICE, which is part of the deal series since 2016, including Simplifile in 2019 and Ellie Mae in 2020, in order to support its mortgage servicing business. By including Black Knight’s technology solutions, ICE can leverage its cutting-edge mortgage-related data assets, leading analytics, and its team of mortgage and technology professionals to strengthen ICE’s fast-growing mortgage technology business. The proposed acquisition will particularly benefit ICE Mortgage Technology, which is part of ICE and is currently the leading cloud-based loan origination platform provider for the mortgage industry. The mortgage data platform from Black Knight can be immediately used for mortgage loan verification, providing a smoother mortgage lending service to clients while lowering the rate of default using the data analytics technology from Black Knight.
The $13.1bn total market value of the acquisition, via an 80% cash and 20% stock offer, will result in a $10.5bn cash expense, potentially causing short-term cash flow trouble that reduces the working capital of ICE. This problem may alleviate when ICE fully completes the integration of Black Knight’s technology into its own mortgage business to start generating revenue. On the other hand, Warren Gardiner, the CFO at Intercontinental Exchange, is confident that the deal will be financially rewarding in a short period: “Black Knight’s high-growth, recurring revenue stream… while the strength of ICE’s balance sheet, and our combined cash flows, position this transaction to be accretive to adjusted earnings in the first full year.”
Long-term Upsides
Black Knight is the largest player in mortgage technology and, although Intercontinental Exchange is best known for owning the New York Stock Exchange, it has been building a large presence in mortgage technology as well. Therefore, if Black Knight and Intercontinental Exchange merge, the combined company will have exposure to the entire mortgage origination value chain. Hence, the House Financial Services Committee has raised some red flags concerning this deal since the combined company would face little competition which would give them the possibility of raising prices, resulting in bad governance. Therefore, if the deal were to go ahead, it would have a significant impact on consumers in the long run potentially having to face a steep increase in prices. The House Services Committee has recently expressed this concern by sending a letter to the Federal Trade Commission explaining that the combined company will “exert significant market power over loan pricing for consumers, access to and sale of consumer data and mortgage software pricing”.
Moreover, since the deal was announced, the price of Black Knight shares has decreased. Currently, the stock is trading at about $59 per share – well below the announced deal value of $85 per share. This fall in the stock price could be a result of the antitrust issues hovering over this merger. Nevertheless, it will leave Intercontinental worrying whether they are overpaying, which would mean they will not get the maximum return possible from Black Knight in the long run.
Library
Get real-time intelligence on over 65,000 private and public companies spanning every major sector and geography, including industry value chains and market maps of competitors and customers.
Expert Interviews
Access comprehensive, unbiased insights on demand from interviews with industry experts led by investors and our sector analysts.
AI search and discoverability
Surface AI-powered insights instantly from the most comprehensive database of expert interviews, with alerts to ensure you never miss the latest insights on topics that matter to you.
Proprietary company database
Accelerate your decision-making with instant access to detailed company profiles on over 65,000 private and public companies, compiled from high-quality expert interviews, augmented with structured data.
- Streamline early-stage research: Eliminate time-consuming preliminary diligence and quickly identify key business drivers, competitive position, growth outlook, and risks.
- 360-degree view: Gain a complete perspective on your target assets with over half a million customer, competitor, and supplier relationships, as well as value chains indexed across the database.
- Unique insights: Easily access the latest interview transcripts tailored to your investment interests to accelerate your research.
Expert interviews
Access on-demand perspectives and insights from our expert network of investors and industry specialists across public and private markets.
Our sector analysts’ deep market understanding ensures relevant insights wherever you invest, with expansive coverage across all sectors and geographies:
- Validate your thesis: Refine your assumptions with deep industry knowledge and human insights from our thoroughly screened and compliance-approved expert network.
- Filter the noise: Cut through overwhelming volumes of broker research, news, and filings to focus on the key issues identified by unbiased experts and operators.
- Build on your investment case: Follow up with any expert to deepen your understanding and explore critical issues.
AI search and discoverability
Seamlessly identify and extract the most relevant expert insights from across the database with AI-powered search and summarization capabilities.
- Confirm your analysis: Validate your thesis with precise answers and actionable insights in response to your questions.
- Reliable intelligence: Attribute insights to transparent and robust citations that link directly back to real experts.
- Regularupdates: Receive alerts on topics and companies of interest to ensure you never miss the latest insights.
Third Bridge helps us ask better questions during diligence because we’re more informed. Without fail this leads to a better outcome for us and our LPs.
Partner, US private equity firm
We look at companies dealing with enhanced risk exposure, so extracting nuanced information directly from those in the know is critical to success. Third Bridge is an absolute must-have for us.
Portfolio Manager, leading European distressed debt fund
What we like about Third Bridge is that it often takes our attention away from consensus opinion pushed by other research providers, and that’s where we typically get ahead of the market.
https://www.mergersight.com/post/intercontinental-exchange-s-16bn-acquisition-of-black-knighthttps://thirdbridge.com/transcripts/black-knight-proposed-acquisition-by-intercontinental-exchange-revenue-growth-outlook/
