By Steven Skomra, Dylan Barnacle, Zach Trotzky (Georgetown University), Karthik Neelamegam, and Adit Rajeev (University of Cambridge) | 24/02/2020
Overview of the deal
Acquirer: Fidelity National Financial
Target: FGL Holdings
Estimated Value: $2.7 bn
Announcement date: 02/02/2020
Acquirer Advisor: Bank of America
Target Advisor: Credit Suisse
FGL Holdings has agreed to a merger agreement in which Fidelity National Financial Inc. will acquire FGL Holdings in efforts to expand beyond its core title insurance businesses. Fidelity will be acquiring FGL for $12.50 per share, representing an equity value of approximately $2.7 billion. Based on the adjusted earnings of FGL, the transaction is expected to be more than 10% accretive to Fidelity’s 2020 earnings per share and more than 20% accretive to Fidelity’s 2021 earnings per share. The transaction was approved by a special committee of FGL Holdings Directors along with a special committee of Fidelity Financial directors along with the Fidelity National board of directors. According to the terms of the agreement, the holders of FGL’s ordinary shares can elect to receive $12.50 per share in cash or 0.2558 of a share of Fidelity’s common stock for each ordinary share of FGL. It is estimated that the aggregate consideration paid to shareholders of FGL’s common shares will consist of approximately 60% cash and 40% Fidelity common stock. Fidelity had a 7.6% stake in FGL as of the end of September 2019. Fidelity will issue approximately 24 million common shares to FGL shareholders, including Fidelity underwriters, representing approximately 7% of Fidelity’s pro forma diluted shares outstanding. Fidelity’s pro forma debt to total capital is expected to be approximately 26% at the close of the transaction.
Acquirer: Fidelity National Financial
Fidelity National Financial, Inc., a Fortune 500 company, is the United States' largest provider of commercial and residential mortgage and diversified services, generating approximately seven billion in annual revenue from title and real estate related operations. It is known as the nation’s largest title insurance company through its title insurance underwriters – Fidelity National Title, Chicago Title, Commonwealth Land Title, Alamo Title and National Title of New York. Collectively, these underwriters issue more title insurance policies than any other title company in the US.
- Founded, Headquarters: Founded 1847 with headquarters in Jacksonville, FL
- CEO: Raymond R. Quirk
- Number of employees: 24,367
- Market Cap: $12.26 bn
- Enterprise Value: $12.18 bn
- LTM Revenue: $8.48 bn
- LTM EV/Revenue: 1.56x
Target: FGL Holdings
FGL Holdings, a holdings company for F&G, is a leading provider of fixed indexed annuities and life insurance through its subsidiaries in addition to providing reinsurance solutions to clients around the world to maximize capital efficiency and options. Serving mainly middle-income Americans, FGL Holdings is committed to helping clients prepare for retirement. FGL holdings trades on the New York Stock exchange under the ticker symbol FG. Family companies include F&G Life Insurance Company, F&G Life Insurance Company of New York, and F&G Re.
- Founded, Headquarters: Founded in 1959 with headquarters in the Cayman Islands
- CEO: Christopher Owsley Blunt
- Number of employees: 300
- Market Cap: $2.67 bn
- Enterprise Value: $2.18 bn
- LTM Revenue: $1.34 bn
- LTM EV/Revenue: 1.20x
Projections and Assumptions
The key short/medium term benefits of the deal are as follows: firstly, it provides F&G with a platform to leverage FNF's institutional relationships with banks, creating a key opportunity to accelerate entry into this channel. Moreover, since Blackstone has aided F&G in its successful portfolio repositioning, achieving higher investment performance alongside lower risk, FNF and the combined company can draw upon this to improve/maintain its already strong financial strength ratings. Furthermore, the deal allows F&G to utilise FNF's customer-base for potential cross-selling. In the words of Chris Blunt, F&G’s CEO: “Upon completion, FNF will provide the ability to fuel our channels for distribution while offering additional cross-selling opportunities.” At the same time, acquiring F&G, a provider of annuity and life insurance products, serves as a key diversification play for FNF, who can use F&G’s proficiency in these areas, especially in annuity markets, to support and expand its current business centred around title insurance – this can help FNF generate a more robust cash flow and income stream in the short/medium term and reduces its exposure to market-related risk.
From a broader stakeholder perspective, FNF has said the transaction is expected to be more than 10% accretive on a pro forma basis to FNF’s 2020 earnings per share and more than 20% accretive to its 2021 earnings per share. Furthermore, upon closing of the deal, F&G shareholders will own roughly 7% of the outstanding shares of FNF common stock. This is a premium of 28% to F&G's 60-day volume-weighted average price and of 17% to F&G's all-time high closing stock price. Thus, the immediate value creation of the deal for shareholders of both companies is clear to see.
The diversification play is especially advantageous when considering the changing structure and preferences of Western population bases. In particular, with the aging of demographics becoming a significant long-term trend, retirement insurance products have a positive long-term outlook in terms of demand and so acquiring F&G’s retirement insurance business is an attractive investment with strong growth tailwinds.
Furthermore, FNF’s strong skills in capital allocation and operational excellence in a related, consolidating industry can be leveraged by F&G to drive sustained free cash flow returns and enhance investments into infrastructure. FNF’s long-term strategic oversight and ownership track record of capital allocation, consolidation and value creation may benefit F&G in supporting their next phase of growth, especially when combined with the fact that F&G will enjoy improved financial strength, access to deployable capital and the ability to leverage FNF’s institutional relationships.
Moreover, F&G’s management team and their rich and unique relationship with leading investment manager Blackstone has enabled and will continue to enable F&G to meaningfully differentiate themselves from competitors. F&G is looking to extend its long-term investment management partnership with Blackstone ahead of the transaction, which will allow the NewCo to benefit from Blackstone’s world-class investment management and strategic oversight capabilities and boost value creation.
Risks and Uncertainties
Fidelity National’s acquisition of FGL Holdings displays an attempt to enter an industry that will perform well in economic environments which are challenging for title insurance. First off, the finalization of the transaction is subject to F&G stockholder approval, federal and state regulatory approval, and the completion of other customary closing conditions. Fidelity National has experienced problems with similar acquisitions in the past as their $1.2 billion deal with Stewart, another title insurance company, was terminated after the failure to satisfy state and federal regulators’ antitrust concerns. However, given the completion of the agreement, Fidelity National will also face concerns as they enter a new industry. Although global life insurance premiums are predicted to grow, they could be halted by the way in which Brexit is implemented, the outcome of the 2020 US election, fallout from possible trade wars, declining interest rates, slowing economic growth in Europe and China, and other macroeconomic factors. However, Fidelity National has grown substantially over the last six years due to strengthening macroeconomic conditions and a healthier domestic consumer. This acquisition may allow for greater organizational growth provided there no major disruptions in the near future that would have a significant impact on the domestic insurance markets.
Additionally, there is considerable uncertainty around how Fidelity National will be able to benefit from entering a new industry going into the future. While the move into life insurance allows for a more diversified stream of income, some investors are uncertain about how markets will value the company now that a quarter of its earnings will come from the FGL segment. However, the move will likely provide some sense of future stability and security as Fidelity National’s title business is more negatively impacted during periods of rising interest rates.
“The transaction presents all of our stakeholders with immediate value while offering F&G a strong platform for continued growth. Upon completion, FNF will provide the ability to fuel our channels for distribution while offering additional cross-selling opportunities.”
-Chris Blunt, F&G President and CEO