BKI - An Update On How To Profit From The Black Knight-Intercontinental Exchange Merger With A Simple Arbitrage Strategy

2023-05-30 03:55:11 ET

Summary

• The FTC filed a complaint to block the BKI-ICE merger, alleging it would harm competition and innovation in the mortgage loan technology market.
• ICE pledged to strongly oppose the FTC's complaint and plans to take it to court, arguing that the merger would benefit customers and consumers.
• The BKI-ICE merger arbitrage opportunity is still alive but has become more complicated due to the FTC's intervention, and investors should adjust their strategies accordingly.

In my previous article , I explained how you could make a sizable profit by exploiting the price difference between Black Knight ( BKI ) and Intercontinental Exchange ( ICE ) stocks, which are involved in a merger deal. The basic idea is to buy BKI shares before the merger and sell the ICE shares received after its completion.

However, since I wrote that article, there have been some developments that have affected the merger and the arbitrage opportunity. BKI stock has been on a rocky decline since this merger was announced.

I have had several investors ask me to write a follow-up, so here we are. In this article, I want to briefly update you on what has happened and how you can adjust your strategy accordingly. This isn't meant to be comprehensive; I just want you to be able to revise your strategy accordingly.

The FTC Tried to Block the Merger

The first major news that came out after my article was that the Federal Trade Commission (FTC) filed a complaint to block the merger, alleging that it would harm competition and innovation in the mortgage loan technology market. The FTC argued that BKI and ICE are the "two largest providers of home mortgage loan origination systems and other key lender software tools", and that their combination would reduce lenders’ choices and increase costs for consumers.

This news came as a surprise to many investors, as the merger had already received approval from other regulators, such as the Department of Justice and the Federal Reserve. This also widened the spread between BKI and ICE shares, creating a bigger arbitrage opportunity for those who believe that the deal will still go through. Based on the merger terms of 0.062 ICE shares plus $68 in cash for each BKI share, this implies a total of $75 per share, providing a 33% profit opportunity.

ICE Fights Back Against the FTC

The second major news that came out after my article was that ICE announced that it would strongly oppose the FTC’s complaint and take it to court. ICE stated that it was confident in its case and that it had compelling evidence to show that the merger would benefit customers and consumers by creating a more efficient and innovative mortgage ecosystem.

ICE also pointed out that the FTC’s complaint was based on a flawed analysis of the market and ignored the realities of how lenders choose their technology providers. ICE argued that BKI and ICE do not compete directly in most of their products and services, and that there are many other competitors in the market that offer similar or better solutions.

Of note, ICE received support from some of its customers and partners, who expressed their views on how the merger would improve their businesses and operations. For instance, Quicken Loans, one of the largest mortgage lenders in the U.S., asserted that it uses both BKI’s and ICE’s products and services, and added that it believes that the merger would create much more value for its customers by streamlining processes, reducing costs, and improving accessibility. This news came as a relief, as it shows that ICE is determined to fight for the deal and has a strong case to defend it.

How to Adjust Your Strategy

So what does all this mean for your arbitrage strategy? Well, it depends on your view of how likely the deal is to close and when you believe it will. Truthfully, it is hard for me to assess the likelihood of completion now that the FCC has taken such a staunch position against the merger. After all, I am just one analyst, and M&A regulation is not something I feel especially comfortable commenting on. I want to offer you some guidance here, however, so I looked at what the smart money had to say. On the bullish side of things, Greenlight Capital and its team of analysts assigned a 75% chance of success and 25% chance of failure for the merger. However, it's worth noting Michael Burry exited his position in BKI, which doesn't necessarily mean he thinks the deal won't close. Burry has been known to close and reopen arbitrage investments closer to their new expected merger date.

Given all of the information presented, if you are bullish on the deal and think that ICE will win the court battle against the FTC, then you can still buy BKI shares at a very nice discount. However, you should be aware that this strategy involves more risk than before, as there is far from a guarantee that ICE will prevail or that the deal will close on time. These unexpected developments with the FTC have simply not been favorable. If you are neutral on the deal and think that there is too much uncertainty around it or that it is fairly priced by the market, then you can exit your position entirely or hedge it with options or other instruments.

My Personal View

As for me, I am closing my position temporarily. I do expect to invest here in the future, but right now, I am far more focused on opportunities surrounding the SVB collapse. I am bullish on the deal and think that ICE has a good chance of winning against the FTC. I think that ICE has a strong argument for why the merger would benefit customers and consumers by creating a more efficient and innovative mortgage ecosystem. I also think that ICE has a strong ability to integrate acquisitions and create value for shareholders successfully.

Therefore, I am issuing a hold rating. As an investor, it is up to you to decide what is best for your strategy. I can say with certainty I will be monitoring the situation closely and adjusting my stance accordingly as new information comes out. In summation, I am of the opinion that this merger may be delayed for some time, but am not convinced that it won't close.

Conclusion

The BKI-ICE merger arbitrage opportunity is still alive but has become more complicated due to the FTC’s intervention. Depending on your view of how likely the deal is to close and when, you can choose to buy or sell BKI and ICE shares in a fixed ratio, exit or hedge your position, or stay on the sidelines.

Ultimately, it is up to each investor to decide based on the information available and their own risk tolerance and return expectations. There is no one right answer or strategy for this situation, as different scenarios can play out and affect the outcome of the deal.

I hope this article has helped you remain up to date on the latest developments and how they affect the arbitrage opportunity at present. I also hope it has given you some ideas on how to adjust your strategy accordingly.

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