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Merger news pushes Fidelity National, Stewart shares up as broader market swoons

The stocks of two title insurers rose on the announcement of a tie-up that had been in the works for months, while other insurers and the broader market sold off.

Fidelity National Financial Inc. and Stewart Information Services Corp. shares rose the same week Fidelity National announced a $1.2 billion acquisition of Stewart. Over the five-day trading period ended March 22, Stewart shares jumped 8.75% while shares of Fidelity National Financial rose 5.91%.

The S&P 500 fell 3.77% to 2,643.69 during the same period, and the SNL Insurance Index dropped 5.11% to 987.98.

The deal, if approved by regulators, would further concentrate the title insurance market, bringing the market share of the top three title insurance groups to about 85%, based on 2017 direct premiums written, and to 85.4% based on title premiums.

In a call to discuss the deal, company executives said the combined title insurer will have to divest businesses in areas of the country where the combined company would have too much market share. Doing so would cost the combined company revenue that Fidelity or Stewart was able to record as an independent entity.

The Federal Trade Commission will determine where the companies would have to let go of businesses or assets to maintain competition. The companies reviewed the pro forma combined market share on a county-by-county basis, Fidelity National Chairman William Foley said.

Foley also said the regulator has asked the company in past acquisitions to avoid situations where the combined entity would have control of or access to a high concentration of property record data.

The companies have been negotiating the merger for at least three months, and the threshold at which revenue loss would reduce the deal consideration was an "intense negotiation," Foley said.

Fidelity's bid for Stewart is half-stock, half-cash, with a $50 million reverse breakup fee if the deal is terminated due to regulator disapproval.

Piper Jaffray equity analyst Jason Deleeuw wrote in a research note that the deal could "exceed" Fidelity National's initial accretion estimates, "given its history of driving better-than-expected cost synergies on previous deals."

However, Deleeuw wrote, the regulatory approval process could pose challenges to the deal, despite executives' plan to overcome them.

Under the terms of the agreement, if the combined company is required to shed assets or businesses for which revenues exceed $75 million up to a cap of $225 million in order to receive regulatory approval, the minimum purchase price will fall to $45.50 per common share.

Stephens equity analyst John Campbell wrote in a research note that his firm was "bullish" on Fidelity National even as a stand-alone entity.

"We do believe a potential breakup would leave [Fidelity National] with considerable dry powder to put to work, so we do believe investors can win either way with a net long position," Campbell wrote.

In the health insurance space, share prices fell the same week lawmakers looked ready to withhold funding for cost-sharing reductions critical to keeping Affordable Care Act markets afloat.

BMO Capital Markets equity analyst Matthew Borsch said in an interview that Anthem Inc., which is still offering plans in some state exchanges, had its "hopes dashed" when some stabilization measures looked likely to be excluded from the bill.

Shares of Anthem fell 4.87% from $230 per share to $218.80 per share during the five-day trading period.

UnitedHealth Group Inc., the largest health insurer in the U.S., saw its shares fall 6.10% in the same period. Borsch attributed the drop to the wider market downturn, together with a large mutual fund that withdrew funds from the insurer.

"When one of the big megafunds decides to downsize its position, it could put a headwind on the stock for quite a while," Borsch said, projecting that UnitedHealth's share price drop could continue.