Twelve days before the final deadline for Fidelity National Financial to close its acquisition of Stewart Information Services, the Federal Trade Commission announced it would look to block the deal.
The deal “threatens to continue a trend of consolidation in these markets,” the FTC said in announcing the move.
Stewart said it was in the process of reviewing the decision.
“While we are disappointed with this outcome and disagree with the FTC’s decision, we are reviewing the lawsuit with FNF in the context of the parties’ rights and obligations under our merger agreement,” the company said in a statement. “We will communicate our next steps to our stakeholders in the near future as soon as this review is complete.”
Demotech President Joseph Petrelli told The Title Report the decision may spell the end of the acquisition.
“I think the quick decision will be, we’re done,” he said. “I’d take ‘not going to fight’ as the larger possibility now.
“On Monday, you might get a ‘no (we won’t fight this)’ but even if it takes longer, I’m not sure that means they’ll decide to fight it.”
The vote to block the deal was 3-1-1, with Commissioner Christine Wilson voting against the order and Chairman Joseph Simons recusing himself. An administrative trial is scheduled to begin Feb. 4, 2020, but if the deal is unable to close by Sept. 18, the acquisition will fall through and the trial will be moot.
“I sympathize with everybody, because I can see all sides to this,” Petrelli said.
In a note to investors, Stephens analyst John Campbell said the move was not surprising.
“In a not-so-surprising move, the FTC put up what could be the final roadblock for the longtime pending FNF acquisition of STC,” he wrote. “While the STC 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 (mergers and acquisitions).”
The agency issued an administrative complaint, alleging the merger would substantially reduce competition in state markets for title insurance underwriting for large commercial transactions, and in several local markets for title information services.
The complaint alleges that the proposed acquisition will reduce the number of significant competitors offering underwriting for large commercial transactions from four to three and eliminate significant head-to-head competition between Fidelity and Stewart in 45 states and the District of Columbia.
The complaint alleges that Fidelity and Stewart are close competitors for large commercial transactions, and this competition results in price and non-price benefits for customers.
However, in February, Fidelity Chairman Bill Foley told analysts that Stewart was not a strong competitor in the commercial space.
“On the large commercial transactions, they reinsure through third parties most of the risks. So again, there is an explanation process,” Foley said at the time. “We are a very small industry that’s very specialized, and it just is a tedious process, and we’re just trying to be patient and work our way through the process.”
The explanation process, however, appears to not have swayed the FTC. In its announcement, the agency said Stewart has shown a willingness to undercut the other Big Four underwriters, and has developed a reputation for finding creative and customer-friendly ways to defer costs.
“Absent competition from an independent Stewart, Fidelity will not need to compete as aggressively on price, coverage, underwriting requirements, or service as it does today,” the FTC stated. “The complaint further alleges that the elimination of Stewart as an independent competitor will increase the ability and incentive of the remaining underwriters to pursue tacitly a more cooperative strategy to the detriment of customers with large commercial transactions.”
“As we suspected, a key concern called out was the overlap and lack of competition in the commercial arena," Campbell wrote in his note to investors.
Each state is a separate market, the FTC stated, as customers seeking to purchase title insurance for property in a given state must deal with a firm licensed in that state. In many states, Fidelity and Stewart’s combined market share for large commercial transactions is greater than 50 percent; in most states, the combined market share is greater than 40 percent.
Petrelli noted that the FTC’s decision focused primarily on the large commercial deals, while the New York Department of Financial Services’ move earlier this year to block the deal focused on harm to consumers in the residential competition.
“Between them, they’ve got all their bases covered,” he said.
The FTC also said Fidelity and Stewart own extensive, overlapping networks of title plants – databases of detailed information about the chain of title to individual properties, indexed to facilitate efficient title searches for underwriting purposes. Access to the information in these title plants, the FTC said, is essential for issuance of title insurance policies in many local markets throughout the United States.
According to the complaint, the merger is likely to result in harm in at least six local areas by eliminating important competition between the title plants that Fidelity and Stewart own separately, and in another right localities by giving Fidelity a greater ownership stake in certain title plants that are subject to joint ownership today.
The FTC also noted cooperation from a number of state attorneys general in their work, and although New York was expected to be the biggest stumbling block for the acquisition – particularly after the Department of Financial Services first denied the deal earlier this year – other states cited by the FTC for help included Arizona, the District of Columbia, Florida, Illinois, Maryland, Massachusetts, Oregon, Pennsylvania, Virginia and Washington.
“The states’ contributions have been invaluable in this matter, and the commission looks forward to continued collaboration,” the FTC stated.