Why Black Knight may be going private

The possible sale of publicly-traded Black Knight to a private equity firm or strategic suitor echoes a similar situation involving fintech vendor Ellie Mae back in late 2018, early 2019.

In the face of a tightening market, Ellie Mae sold itself to private equity firm Thoma Bravo, primarily to allow the company to make moves outside of the watchful eyes of investors, then-CEO Jonathan Corr said in a May 2019 interview after the transaction closed.

Black Knight is the nation's largest servicing technology platform, but also operates in many of the same business lines in origination technology as Ellie Mae, which was subsequently sold to Intercontinental Exchange and is now a part of ICE Mortgage Technology.

"Sometimes as a public company, you have to be all ears," said John Campbell, an analyst with financial services firm Stephens. "If you're going to get an attractive offer with a 30%, 40% takeout premium, being a publicly-held company you have to listen."

Part of the reason to consider a sale might be management's frustration with Black Knight's stock price, Campbell added. Since closing at $95.48 on Nov. 4, 2020, the company's stock has trended lower. Its most recent peak was at $81.33 per share on Jan. 4 and Black Knight closed at $59.27 per share on April 3, the day before Bloomberg reported a sales process might be underway.

The similarity between the Ellie Mae situation in 2018-2019 and Black Knight today is the first thought that crossed the mind of Henry Coffey, an analyst with Wedbush Securities.

Marketplace conditions made investors nervous about Ellie Mae at that time, and so the company reached out to the private equity market. Today, concerns for Black Knight are around regulations, the tight housing market and even the competitive landscape in servicing technology, which could be pushing that company in the same direction.

"Given all their cash flows and ownership base, why wouldn't they go private for a while so that they can address whatever they want to address without getting on the phone with institutional investors every third day?" Coffey said.

Among the differences is that Black Knight is not as leveraged as Ellie Mae was at the time, Campbell said. There’s less of a need for restructuring by going private. One of the first moves made by Ellie Mae after the deal closed was a 10% reduction in its staff.

Black Knight has made some positive moves as of late, including acquiring the outstanding shares of Optimal Blue from its partners in that acquisition, Cannae Holdings and Thomas H. Lee.

"But at some point, when they're not getting the credit they deserve, private equity or a strategic buyer will come in and take advantage of that," Campbell said. "I think that's probably the stage we're in right now."

If a deal is afoot, Campbell doesn't think it has anything to do with Sagent becoming a stronger competitor for servicing technology after its tie up with Mr. Cooper. Rather, it is a situation that is Black Knight-specific.

However, Sagent could be weighing on the minds of investors and that's being reflected in Black Knight's stock price, Coffey said.

"In terms of potential buyers, private equity seems like a more natural route considering the strong margin and cash flow profile of the business with moderate current leverage (3.9 times net debt/EBITDA), as well Chairman Emeritus Bill Foley's network of relationships," Keefe, Bruyette & Woods analyst Ryan Tomasello said in a research note. "However, we do believe Black Knight could also appeal to a select list of strategic buyers."

Among those he cites are ICE and CoStar Group. But any combination with ICE could trigger antitrust concerns from a federal government whose stated policy is to encourage competition. A possible solution would be to sell or spin-off Black Knight's Empower loan origination system.

CoStar, as one of the failed bidders for CoreLogic, might be interested in the company "in an effort to bolster its entrance into residential technology/marketplaces," Tomasello said. "Black Knight shares similar qualities with CoreLogic that CoStar could also view as attractive in its residential buildout, particularly its data & analytics assets and MLS relationships, and so could provide CoStar with similar benefits."

Ironically, among the other unsuccessful suitors for CoreLogic was Foley through Cannae in a joint bid with Senator Investment.

Another participant might be Thomas H. Lee, which, besides Optimal Blue, has done a number of transactions with Foley-connected entities, including owning a majority stake in Black Knight at one point.

Foley "does not lack access to resources, or intelligence or management expertise," Coffey said. "But we don't know" if he will be a potential buyer for Black Knight. "We just know that there's multiple parties out there" that are potential suitors.