What's the motivation behind Black Knight's common stock offering?
Proceeds from Black Knight's latest common stock offering, estimated to hit $435.55 million, may be used primarily to pay down debt as the company has claimed. But industry analysts believe the offering is intended to raise funding for future acquisitions.
The mortgage technology company is selling 6.2 million shares, with an underwriters' option to purchase an additional 930,000 shares. The $70.25 per share offering was below Black Knight's June 16 closing price of $73.39.
The offering has also been upsized from the deal the company originally announced after the market closed that day, which included 5.6 million shares with an underwriters' option for 840,000 shares.
The company says it plans to use the funds to pay down its revolving credit facility. Black Knight had $416 million of principal outstanding of the $750 million total available as of March 31, according to its first quarter Security and Exchange Commission filing.
But, almost as if an afterthought, at the end of its list of uses for the proceeds, Black Knight stated that it "may include future acquisitions and investments."
Some analysts believe that might be the true reason for the capital raise.
When it came to paying down debt, "we would be surprised if that's the sole purpose of this raise," said a report from John Campbell, an analyst with Stephens Investment Banking. "As far as our line of sight and views on the balance sheet, there appears to be no immediate need for capital. However, we do believe that there has been active capital raising efforts in recent weeks across other Foley-backed companies so there could be a common connecting thread. Only time will tell."
Campbell is referring to Bill Foley, who among his many business interests, is the chairman of Fidelity National Financial, the executive chairman of Black Knight and the vice chairman of Fidelity National Information Services. On June 9, Fidelity National Financial priced $650 million in a debt offering.
Keefe, Bruyette & Woods analyst Bose George was more direct in his assessment of Black Knight would do, aside from paying down debt.
"The company could also be preparing for future acquisitions. Management has often pointed to a targeted leverage (net debt to last 12 months adjusted EBITDA) of 3 times, but has also indicated it would be comfortable going above that if the right opportunity presents itself," George said in his report.
"Leverage was at 2.7 times at the end of the first quarter. With the new equity and stretching leverage to 4 times (which it was last at in 2015), we estimate the max size of a potential target would be in the $1.2 billion range, though we do not expect something that large," he noted.
There have been "opportunistic raises from similar companies" recently, like CoStar Group and RealPage, given the strength of technology stocks, George added.
Black Knight, which, along with a less popular loan origination system, operates the nation's largest mortgage servicing platform, had first-quarter earnings of $50.1 million, up 93% on a year-over-year basis.