FTC may still reject Black Knight deal after Optimal Blue sale

Black Knight's proposed sale of Optimal Blue to Empower's buyer Constellation Software may be the piece that unlocks the Federal Trade Commission's opposition to the transaction with Intercontinental Exchange.

But it doesn't mean that an approval is a slam dunk either.

"It is a significant step toward a potential resolution of the FTC concerns," said Michael Lindsay, a partner at the law firm of Dorsey & Whitney, where he is the co-chair of the antitrust practice group. "But the fact that it seems to be done outside of the FTC normal process, where you enter into negotiations over a consent judgment, means that it will be a rockier road."

Given Optimal Blue's domination of the product and pricing engine business, it was hard for ICE to give up this asset. But it was always going to take more than an Empower sale to get the process moving, explained David Stevens, a former Obama Administration official and Mortgage Bankers Association chief executive who is now CEO of Mountain Lake Consulting.

The Optimal Blue sale tells Stevens that "ICE is 100% committed to getting the Black Knight servicing platform and to getting this deal done at almost any cost," which might have been unthinkable to them at the time the deal was agreed upon.

And this latest wiggle doesn't mean some deal opponents, like the Community Home Lenders of America, changed their minds.

"The sale of Optimal Blue does not alleviate CHLA's concerns that the merger between ICE and Black Knight will foster a greater monopoly in the market for mortgage services," a statement from the organization said. "We remain concerned that this merger will harm small and midsize IMBs," independent mortgage bankers.

The FTC, along with Intercontinental Exchange and Black Knight, have asked for a postponement of a Thursday hearing in the Federal District Court for the Northern District of California.

The wording of the motion, some observers have noted, indicated that the FTC might have gotten a head's up about the sale.

"The planned sale of Optimal Blue is a significant development in the case and requires time for FTC Staff to (1) analyze the implications of the divestiture for this case and the parallel administrative proceedings, (2) discuss a potential resolution of the pending matter with Defendants, and (3) advise the FTC Commissioners," the filing made Monday morning stated.

The consideration for Optimal Blue could be a sticking point for regulators.

Terms call for Constellation to pay $200 million in cash, with another $500 million due in a promissory note to Black Knight as a subsidiary of ICE after the deal closes.

When Keefe Bruyette & Woods analyst Ryan Tomasello first wrote about a possible Optimal Blue sale, he anticipated a fire-sale price between $1.5 billion and $2 billion for an asset valued at $2.9 billion when Black Knight bought it.

The $700 million total "is much lower than what we imagined in a fire sale, the merger consideration importantly appears unchanged (as we expected)," Tomasello said in a new report issued after the transaction was announced.

"We believe Constellation also buying Optimal Blue strengthens the case for Constellation being viewed as a competitive buyer of the divested Empower business," Tomasello continued.

But the FTC can still determine these divestitures do not resolve its antitrust concerns, Lindsay said.

Both the FTC and the antitrust unit at the Justice Department have a process to determine if the buyer is actually suitable for the transaction. "Does it have the assets to run the business? Does it have the right incentives to compete? Does the agreement in any way undermine those incentives?" Lindsay asked.

And in fact, the seller's financing in a transaction, such as via a promissory note, can be a problem for the regulators. The FTC would also examine whether these businesses be operated as standalone entities.

"So it's not enough that the business units at issue are being transferred if in fact they need some other assets in order to operate those businesses with the same competitive force that they have today," said Lindsay.

And the FTC had put in its legal filings from June 30 that a Constellation-owned Empower would not be able to compete without Optimal Blue, stating "Constellation will be unable to offer the single point of contact for pricing, contracts, and vendor management."

Another reality facing a Biden Administration that promised to be tough on merger and acquisition activity is a string of losses in the court system, including this past week, in which both a district court judge and appellate panel denied the FTC an injunction to halt the Microsoft-Activision Blizzard transaction.

Another recent court decision, the UnitedHealth-Change Healthcare case, found that a planned divestiture was sufficient to overcome antitrust concerns; that ruling has been cited as a precedent by ICE and Black Knight.

Stevens noted he is opposed to monopolies and the one being created here with Black Knight's servicing business is significant.

In fact, Black Knight is already being sued by PennyMac over antitrust concerns in the servicing technology business, Stevens pointed out. (Black Knight filed its own case against PennyMac over the stealing of trade secrets around the same time.)

At the end of the day, ICE and Black Knight might have just given the Federal Trade Commission an exit strategy rather than having to face another high profile potential loss in court, Stevens said.