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Expected revenue loss was 'sticking point' in Fidelity National's deal talks

Working out financial protection for an expected loss of revenues was a major hang-up for Fidelity National Financial Inc. as it negotiated its acquisition of Stewart Information Services Corp., said William Foley, chairman of Fidelity National.

The companies expect that the combined title insurer will have to shed businesses in areas of the country where the merger would result in a single title insurer dominating the market.

The Federal Trade Commission will determine where the companies would have to divest businesses or assets to maintain competition. The companies reviewed the pro forma combined market share on a county-by-county basis, Foley said during a conference call to discuss the deal.

The agreement the two companies struck would reduce the purchase price for Stewart Information to as low as $45.50 per common share from the announced consideration of $50 per share if the anticipated revenue loss reaches $225 million.

Fidelity and Stewart had been negotiating the tie-up for three months or more and the threshold at which revenue loss would reduce the deal consideration was a sticking point, Foley said.

"They wanted a lower threshold, and we wanted a higher threshold," he said. "It was an intense negotiation."

The companies have identified counties in which business concentration will likely force them to divest business, Foley said. Nationwide, the merger will give the combined company a market share of about 41% to 42%, Foley said.

Investors speculated that Fidelity National was aiming at an acquisition of Stewart Information when Foley explained during his company's fourth-quarter 2017 earnings call that it pushed back its share repurchase program because of deal talks, Barclays analyst Mark DeVries said in a March 19 note to clients. Foley did not identify Stewart as the potential target, but the company in November 2017 announced that it was exploring strategic alternatives. Foley thought during the Jan. 31 conference call that the transaction he referred to was not likely to happen, according to a transcript.

DeVries said the deal was a positive for Fidelity National due to the expected accretion, and that management's estimate of $135 million in savings could be conservative, given Fidelity's recent record of acquisitions and integrations.

Shares of both companies climbed in the hours following the deal announcement even as broader market indexes trended down.

Because the purchase would not require Fidelity to use a great deal of cash, the company will revisit share repurchases when the deal closes, the chairman said.