ICE talking with feds to save Black Knight deal

Intercontinental Exchange is currently in discussions with the Federal Trade Commission for "a potential resolution" regarding its acquisition of Black Knight, Jeffrey Sprecher, chairman and CEO said during his company's earnings call.

If some sort of agreement is not reached, a federal trial is scheduled for Aug. 14 to Aug. 16 regarding the FTC's move to quash this merger. That trial was delayed by the agreement for Black Knight to sell Optimal Blue to Empower's proposed buyer Constellation Software.

"We intend to provide additional performance details upon the closing of Black Knight, but it's worth noting that we continue to target revenue synergies of $125 million and expense synergies of $200 million by year 5," Sprecher said. "As the largest distributor of Optimal Blue via our network, we remain very excited about the value and efficiencies that the combined ICE and Black Knight entities will bring to the end consumer as well as to other stakeholders across the mortgage ecosystem."

But in the current period ICE Mortgage Technology reported an operating loss of $17 million, compared with a loss of $28 million in the first quarter and $6-million loss one year ago.

Revenue was higher compared with the first quarter: $249 million versus $237 million. But one year prior, ICE Mortgage Technology reported revenue of $297 million.

Expenses grew slightly quarter-to-quarter, $266 million from $264 million, but were improved over the $303 million posted in the second quarter of 2022.

"We have continued to see in the second quarter some headwinds from M&A, consolidation and [lenders] going out of business, although it's been relatively small," Benjamin Jackson, Intercontinental Exchange president and ICE Mortgage Technology chairman, said on the earnings call.

And the ongoing angst over the merger likely took a toll on Black Knight, company management admitted.

"Our second quarter results reflect a weaker than expected mortgage market coupled with the near-term effects of the proposed merger with Intercontinental Exchange," CEO Joe Nackashi said in a press release. "Revenue declined 4% on an organic basis driven by lower origination volumes as well as indirect effects of the mortgage market on our Originations Software business."

That last area includes the units Black Knight is selling in order to win approval of the ICE deal, whether by the regulator or in court.

Net earnings of $55.3 million for the second quarter missed both consensus and Keefe, Bruyette & Woods estimates.

"The miss to KBW was driven by lower revenue, partly offset by lower interest expense and a lower share count," Ryan Tomasello, an analyst, said in a flash note.

Management commentary, only made in the release because it has not hosted an earnings call since the deal was signed, took "a more cautious tone than last quarter," Tomasello said. "The proposed ICE merger also continues to be an overhang on sales (as well as Black Knight's ability to manage expenses)."

In the first quarter, Black Knight earned $141.8 million, while for the second quarter last year, it earned $40.3 million.

Software solutions, which includes both the servicing and origination technology products, had operating income of $134.1 million down from $154.8 million a year ago.

While servicing revenue was down approximately $200,000 versus the second quarter of 2022 to $221.5 million, the same line on the originations side was $15.6 million, or 13%, lower at $102.1 million.

Data & Analytics results were affected by Black Knight's sale of TitlePoint back to its former parent Fidelity National Financial. Operating income fell to $6.8 million from $13.7 million year-over-year, while revenues declined 19%. Without the impact of the sale, segment revenue was down only 1%.