FTC drops case against Black Knight and ICE

The Intercontinental Exchange purchase of Black Knight took one giant step closer to completion this morning as both companies joined the Federal Trade Commission in a motion to dissolve the temporary restraining order.

Any agreement is not likely to satisfy deal opponents like the Community Home Lenders of America, who are worried about the breadth of the market ICE Mortgage Technology could possess unless certain conditions are applied.

The filing in the Federal District Court for the Northern District of California was made without prejudice, meaning that the restraining order request can be brought back before the court if settlement negotiations are unsuccessful. Without this motion, the court had been set to hold a hearing between Aug. 14 and Aug. 16.

Several observers have noted the FTC might be out to save face following some big losses in antitrust litigation, including Microsoft-Activision Blizzard.

On ICE's Aug. 3 second quarter earnings call, Chairman and CEO Jeffrey Sprecher said his company was in discussions with the federal agency.

Besides removing the restraining order, ICE and Black Knight agreed to not close the transaction for 10 calendar days following signing an "Agreement Containing Consent Orders" for submission to the FTC. That related agreement is indicative of how close the parties might be to a settlement, a note from Ryan Tomasello of Keefe, Bruyette & Woods said.

If an agreement is not reached by Aug. 25, the 10-day hold pact can be dissolved with three days' notice by any of the parties. 

On Aug. 4, before this latest wrangle, the Community Home Lenders of America, which has been outspoken in its opposition, sent a letter to both the FTC and the Consumer Financial Protection Bureau, demanding "If... this purchase is approved, there must be a process to monitor and curtail ICE anti-competitive actions, either as a part of an agreement with the FTC or through CFPB monitoring and use of statutory authorities to prevent anti-consumer actions."

The divestitures of the Empower loan origination system and Optimal Blue product and pricing engine (both are being sold to Constellation Software in separate transactions) will not prevent the combination from using its pricing power against independent mortgage bankers, the letter said.

ICE already engages in such practices as "one-way pricing mechanisms for user seats, vendor access click fees that are simply junk fees tying and bundling, and unfair treatment of lenders," the letter said.

As for alternatives to Empower, most independent mortgage bankers can't create their own LOS so the realistic alternative of switching is difficult because it is not compatible with other systems and ICE is unwilling to facilitate system switches, CHLA said.

"ICE's determination to move forward with the purchase, even being willing to divest Empower and Optimal Blue, implies that they see significant vertical integration pricing advantages of becoming the dominant player in software services for both mortgage origination and servicing," the letter said.

CHLA wrote the letter as talk about a possible settlement began to gain steam. The group is looking for the FTC to add stipulations to any settlement agreement to address those concerns, said Scott Olson, its executive director. It also wants the CFPB to monitor and take action for any anti-consumer impacts.

"These issues and concerns are not going to go away," Olson said in a follow up interview.

ICE had not responded to a request for comment by press time.

While noting the imminence of a trial is a motivating factor for a deal to be reached, it doesn't mean it is a certainty.

"There are details to be worked out, and some of the provisions that the FTC has required in recent divestiture deals are more onerous that the FTC has historically required," said Michael Lindsay, a partner at Dorsey & Whitney and co-chair of its antitrust practice group, in a statement. "That may have been why this deal wasn't reached before — and could still be the reason why the FTC and the merger parties cannot get to a final agreement."

But the markets are now betting that the deal will close. The revised terms following the Empower agreement brought the purchase price down to around $75 per Black Knight share to be paid in ICE stock and cash.

In recent weeks Black Knight has been hanging around $70 per share since the Optimal Blue sale was announced. On Monday morning it opened at $74.75 per share after closing on Friday at $71.50.

"If the deal does not go through for some reason (which seems unlikely at this point), Black Knight would still receive a $725 million break-up fee before tax and also has remaining equity ownership in Dun & Bradstreet to factor into the valuation (over $200 million after tax)," William Blair analyst Stephen Sheldon in a note this morning. "In aggregate, we estimate the after-tax value from these two items would be just over $5 per Black Knight share."

KBW gives the deal a $75.64 per share current valuation, while William Blair puts it at "just under" $76 per share.