Fidelity Prepares to Separate Title, Technology Units
The ever-changing corporate structure at Fidelity National Financial Inc. here will be changing once again.
It has sent a proposal to two related firms that would result in the creation of two independent public companies. The other firms involved, both of which the current FNF owns a majority share of, are Fidelity National Information Services Inc., which trades under the ticker symbol FIS, and Fidelity National Title Inc., which trades under the ticker symbol FNT.
The stock price of FNF was the major beneficiary of the announcement. Late in the afternoon on April 27, the day of the announcement, it was up $7.31 on the day to $42.30. FNT was up only $0.13 to $22.23, while FIS saw its stock price drop by $1.49 to $37.30.
In the past, Fidelity had spun off a predecessor of FIS, reconsolidated it back into the parent company, and then spun it off again. Fidelity's Mortgage Servicing Package, used by many large lenders, is part of the FIS unit.
It was just one year ago that FNF announced it was looking to create FNT.
At that time, William P. Foley, chairman and chief executive of FNF and chairman of FIS and FNT, said, "We believe that it has been difficult to appreciate the full value of our distinct business lines in a single publicly traded security. Separating the businesses that comprise FNF into distinct companies will provide improved transparency for the investment community and a potentially simpler means of valuing the assets of FNF."
He also added that the spin-off would allow FNF to pursue certain acquisitions.
But the reasoning for the latest restructuring is because the opposite has occurred.
In a statement announcing the proposal, Mr. Foley said, "While we were hopeful that the holding company structure, with FNF having ownership stakes in public and private operating subsidiaries, would allow for a simpler valuation of the pieces of FNF, that simply has not proven to be the case as the market has meaningfully discounted the value of FNF in relation to the sum of its parts. The majority ownership stake that FNF has in both FNT and FIS limits the public float for each company, which may be significantly shrinking the universe of eligible shareholders for FNT and FIS and limiting the trading liquidity, and thus the valuation, of the stock of both FNT and FIS."
He added during a conference call that investors continued to think of FNF as primarily a title insurance company and valued its stock as such. Furthermore, because FNF had majority stakes in FIS and FNT, it was only able to do acquisitions for cash. Mr. Foley said the company would be able to use stock in what is being called the new FNF as currency for transactions. FNF owns 82.5% of FNT, 50.7% of FIS and 40% of a company called Sedgwick CMS Inc.
The first part of the complicated transaction calls for FNF to transfer its specialty insurance businesses, plus the stake in Sedgwick CMS, and other assets including $220 million in cash to FNT. FNT will pay in its stock for these assets. FNF expects to propose consideration in the range of $1 billion to $1.25 billion.
Next FNF will spin out its entire ownership stake in FNT to its existing shareholders in a tax-free distribution. The only remaining asset of FNF after this occurs will be its stock in FIS.
FIS and FNF will be merged into a single company in the third step, with FIS being the surviving entity. It is anticipated there will be a "one for one" exchange of equity where FNF shareholders will receive FIS stock. But because FNF does not own all of FIS, it is not a one share for one share exchange Mr. Foley explained. The ratio will be based on FNF's 50.7% stake in FIS.
Finally, FNT will be renamed Fidelity National Financial and trade under the FNF ticker symbol.
In separate statements, the boards of FNT and FIS said they had formed special committees to evaluate and negotiate a formal proposal.
The announcement of the restructuring proposal came one day after all three companies announced their first-quarter earnings.
FNF had earnings of $106.4 million, or $0.59 per share, down from $126.3 million, or $0.71 per share, one year ago.
FNT reported profits of $79.1 million, or $0.46 per share, down slightly from $82.3 million, or $0.47 per share, one year ago. Raymond R. Quirk, chief executive, added, "Our earnings for the month of March were significantly larger than our combined earnings for the months of January and February and the increasing trend in open order volumes throughout the first quarter provides momentum as we enter the second quarter."
The FIS results were given on a GAAP and pro-forma basis because of the Feb. 1, 2005 merger with Certegy and a March 2005 recapitalization.
Using GAAP, FIS earned $39.4 million, or $0.23 per share, down from $44.6 million, or $0.35 per share, for the first quarter 2005. But on a pro-forma basis, net earnings were $58.6 million, or $0.30 per share, for the most recent quarter, up from $41.1 million, or $0.22 per share.
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