The odds favor an FTC settlement of ICE-Black Knight deal

Divestiture of Black Knight’s Optimal Blue leaves the FTC with a weak case as it remedies the remaining horizontal overlap cited in the FTC's complaint: KBW

The Federal Trade Commission (FTC) looks poised to settle on the merger deal with Intercontinental Exchange Inc. (ICE) and Black Knight, Keefe, Bruyette & Woods (KBW) said in a note following the postponement of the preliminary injunction to August from this week.

ICE and Black Knight’s agreement to sell its product and pricing engine unit Optimal Blue business leaves the FTC with a weak case as it remedies the remaining horizontal overlap cited in the FTC’s complaint with a competitive buyer, Ryan Tomasello, managing director of KBW, said in the note published on July 24. 

FTC’s suit in March to block the proposed merger between ICE and Black Knight had two main allegations. 

The companies that have the two largest loan origination systems (LOS) will allegedly raise costs to lenders which would then be passed to homebuyers; and the deal would eliminate competition for product, pricing and eligibility engines (PPEs) and other various ancillary services that are add-ons to LOS, the FTC argued.

ICE and Black Knight agreed to sell Black Knight’s LOS Empower business and Optimal Blue to a subsidiary of Constellation Software Inc. to address antitrust concerns raised by the FTC.

Following an agreement to sell Black Knight’s Optimal Blue, the FTC, ICE and Black Knight asked a federal court to delay a preliminary injunction hearing set for July 24-26 to August 14-August 16. The Federal District Court for the Northern District of California granted the request to have the hearing continued on Aug. 14.

The planned sale of Optimal Blue requires time for the FTC staff to analyze the implications of the divestiture for this case and divestiture for this case and the parallel administrative proceedings; discuss a potential resolution of the pending matter with Defendants;  and advise the FTC Commissioners, the parties said in the court filing.

“Considering the FTC concurrently filed a joint motion with ICE/BKI to postpone the trial, this implies to us that there may have been some level of coordination among the parties,” Tomasello said in a note.

It is possible that the FTC requires time to review the final executed sale agreement before formerly determining its decision to settle. If a settlement is reached, KBW believes it would be before the postponed August 14 trial, allowing the deal to close in the third quarter of 2023. Tomasello added.

“The FTC can spin a settlement as a victory following several losses and recent congressional scrutiny,” Tomasello said.

While analysts at KBW don’t dismiss the potential for the deal to still go to trial, they also see a “very high likelihood of approval” even if it goes to court next month.

Some investors have noted that a settlement could signal the FTC’s willingness to accept last-minute divestitures, as well as sign off on financial (private equity) buyers, which the FTC has historically viewed as uncompetitive, according to KBW. 

Other investors’ reasoning for the deal to still go to trial in August include the FTC attempting to expand the scope of its complaint beyond the LOS and PPE overlap and the FTC focused on rewriting the antitrust law rather than winning in court.

Most investors seem to agree that the judge would be unlikely to permit the submission of substantially new arguments at this stage and the FTC will have a much weaker case in court following the divestiture of Optimal Blue, KBW added. 

Moreover, the judge’s willingness to grant the joint motion to postpone the hearing seems an implicit acknowledgment of the divestiture as a material development that should
be considered at trial, Tomasello noted.

“We believe deal approval via a trial would allow the merger to close in late-3Q/4Q,” Tomasello said.

If the merger goes through, it would be the second recent major mortgage tech deal for ICE, and would follow the acquisition of Ellie Mae from Thoma Bravo for $11 billion in 2020.

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