First American Corp. in Santa Ana, Calif., said Monday that it has offered to buy the 25% it does not already own of the credit-information provider First Advantage Corp., thus increasing its "financial flexibility."
The offer, which values all of First Advantage at $837 million, is for $14.04 per share, a 10% premium to Friday's closing price.
First American's bid is 0.5375 share of its stock for each First Advantage share.
"Acquiring the minority interest in First Advantage will enhance our financial flexibility, reduce organizational complexity and provide greater overall operational efficiency," said First American's chairman and chief executive officer, Parker S. Kennedy, in a press release.
The deal, if consummated, would boost First American's 2010 earnings, the company said.
The California company and the rest of the title insurance industry continue to be roiled by the housing market slump. The sector gets much of its business through mortgage originations, which have slid along with home sales. To cope, First American has been tightening expense controls and cutting personnel costs in an effort to improve efficiency.
In January of last year, the company announced it would spin off its financial services arm, which sells title and other insurance. Such a spinoff, which has yet to be completed, would leave First American with an information services business that does things for lenders such as monitoring the property-tax status of the real estate securing their loans.
First Advantage supplies specialized credit reports to mortgage lenders. It buys reports from at least two of the three main credit bureaus — TransUnion LLC, Experian Information Solutions Inc. and Equifax Inc. — then merges and summarizes them in a standard format. This activity accounted for 18% of First Advantage's revenues last year. The Poway, Calif., company also provides background checks for car dealers, landlords and employers.
Jim Ryan, an analyst at Morningstar Inc., wrote in a note to clients Monday that First Advantage would become part of First American's information services arm if the deal were consummated.
Fitch Inc. said Monday that the proposed acquisition would "simplify the legal and organizational structure of the companies, which will aid in the proposed spinoff."
Though the spinoff was initially scheduled to take place in last year's third quarter, Fitch said, "market conditions have forced a delay."
First American's management team has said "it is still committed to the spinoff but will only do so when the conditions are favorable," Fitch said. The information services unit, the rating agency said, "has acted as a shock absorber during this recent downturn in the real estate cycle."
The buyout of First Advantage would also improve corporate governance for the two companies and could lead to cost savings, Fitch said.
Brian W. Ruttenbur, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., wrote in a note to clients Monday that the proposed transaction "must be approved by … [First Advantage's] independent directors and, we believe, by a majority of" its shareholders other than First American.
However, he wrote, "we believe there is a solid chance that a deal will be agreed upon at some price," and he suspended coverage of First Advantage shares. Fitch said it expects the deal to close by yearend.
Ryan wrote that the offer price is "essentially book value." Despite the expected boost to First American's profits next year, he wrote, the proposed acquisition "is not enough to move the needle, in our view," and he left his estimate of First American shares' value unchanged.