A divesture of Black Knight‘s product and pricing engine unit Optimal Blue is a feasible path to guarantee the merger deal with Intercontinental Exchange Inc. (ICE), Keefe, Bruyette & Woods (KBW) said in a note issued ahead of the federal preliminary injunction ruling expected later this month.
“While we recognize that Optimal Blue is a high-quality asset, we do not believe it is a necessary component of the deal, particularly when considering ICE’s potential ability to build a similar solution organically or acquire a smaller competitor,” Ryan Tomasello, managing director of KBW, said in the note published on July 6.
The Federal Trade Commission (FTC) filed suit against ICE in March, alleging that the merger would give ICE and Black Knight a significant position in the market for loan origination software, which it could use to push customers to its other mortgage services and products instead of competitor offerings. The agency also claimed that the deal, announced in May 2022, would hinder innovation and reduce lenders’ choices for both origination and mortgage servicing.
Constellation Software Inc., which agreed in March to acquire Empower, Black Knight’s loan origination system, is the “most natural suitor” in being a potential buyer, Tomasello said.
KBW noted the ideal window of timing to divest Optimal Blue would be in advance of the preliminary injunction action hearing, set to begin on July 24.
In April 2023, the FTC petitioned a California federal court to issue a temporary restraining order (TRO) and preliminary injunction (PI) that prevents ICE from going forward with the deal to buy Black Knight. The goal was to give the commission time to pursue in-house litigation against the merger.
The Federal District Court for the Northern District of California will rule on the preliminary injunction before the FTC holds its administrative hearing in September.
While KBW noted that the sale of Optimal Blue would be ideal prior to the trial, a sale of Optimal Blue is “theoretically possible” post-trial, but before the judge’s ruling, which should take several weeks.
The divestiture could take place as part of a settlement that is negotiated either directly or under the advice of the district court judge, KBW said.
KBW sees “limited needle-moving acquisition alternatives” for ICE in the mortgage category beyond Black Knight.
“We believe ICE is committed to closing the deal and is open to divesting Optimal Blue as a final option to guarantee the merger’s closing,” the report states.
But despite the potential discounted valuation for Optimal Blue, KBW said there’s little likelihood that the ICE-Black Knight deal would be repriced.
The two companies previously amended the deal terms to reduce the Black Knight valuation to $11.8 billion from $13 billion, about 11% lower than the valuation when the agreement was announced in 2022.
If the merger goes through, it would be the second recent major mortgage deal for ICE, and would follow the acquisition of Ellie Mae from Thoma Bravo for $11 billion in 2020.
ICE and Black Knight did not respond to requests for comment.