Intercontinental Exchange buying Black Knight for $13.1B

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In a deal that is likely to arouse antitrust scrutiny by the Biden administration, Intercontinental Exchange, the owner of the mortgage industry's most widely used loan origination system, is buying Black Knight, which has a similar market penetration on the servicing side.

The 80% cash and 20% stock transaction values Black Knight at $85 per share, for a market value of $13.1 billion. Intercontinental Exchange expects cost synergies of $200 million after the deal is completed. The first one-third will be realized in the first year, the next two-thirds by year three, and full synergies in five years.

Investor questions linger around potential antitrust challenges, but John Campbell, an analyst at Stephens believes that the deal could get through a Hart-Scott-Rodino regulatory review. 

"Particularly, we believe that Black Knight's Empower (loan origination solution) might be the only real hangup (if there is one)," Campbell said in a research report issued after the deal was announced.

The Biden administration, however, is looking to foster greater competition between market players and has made moves to prevent mergers and acquisitions that would limit choices for consumers.

Last month, speculation arose that Black Knight was considering going private, much in the same way Ellie Mae — now owned by ICE — did in early 2019. Some in the marketplace wondered about a possible strategic buyer, with ICE identified as one of the likely suitors.

ICE paid $11 billion for Ellie Mae in August 2020.

Since that speculation began, Black Knight's stock has been trading in the low- to mid-$60 range. But after the announcement, it shot up as high as $77.79. Black Knight closed at $72.95 on May 4, up $9.32 on the day.

"This transaction will benefit ICE, Black Knight, and our collective shareholders," Warren Gardiner, the chief financial officer of Intercontinental Exchange, said in a press release. "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."

ICE will fund the cash component of $10.5 billion with newly issued debt and cash on hand at the time of closing, expected in the first half of 2023. The company plans to comment further on the deal during its May 5 earnings call.

"Black Knight has been on a successful journey to transform the mortgage industry by providing our clients with powerful, interconnected solutions that help them achieve greater efficiency and better serve their customers," said Anthony M. Jabbour, Black Knight's chairman and CEO. "We believe this combination is the right next step in that journey."

Both companies have units in other portions of the mortgage business, including marketing. Black Knight owns the Optimal Blue product and pricing engine.

Besides what was known as Ellie Mae, ICE Mortgage Technology owns Simplifile and MERS. But MERS is now getting a competitive threat from Blue Sage Solutions, First American Docutech and Figure Technologies called Digital Asset Registration Technologies.

Goldman Sachs and Wells Fargo Securities are the lead financial advisors to Intercontinental Exchange. Shearman & Sterling and Morgan Lewis & Bockius are its legal advisors. J.P. Morgan Securities is Black Knight's exclusive financial advisor and Wachtell, Lipton, Rosen & Katz is legal advisor.