More suitors for LandAmerica

Stewart applies to acquire LandAmerica underwriters

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Fidelity National Financial Inc. is not the only suitor hoping to snatch up LandAmerica Financial Group Inc.’s title insurance underwriting subsidiaries in bankruptcy court, according to creditors seeking to derail fast-track approval of the sale.

LandAmerica says it hasn’t received a better offer than the combined $298 million Fidelity is offering for Lawyers Title Insurance Corp., Commonwealth Land Title Insurance Co. and United Capital Title Insurance Co., and has asked the bankruptcy court to approve the sale next week.

LandAmerica filed for Chapter 11 bankruptcy protection Nov. 26, saying it planned to sell off the title insurance underwriting subsidiaries that account for up to 90 percent of its annual revenue in order to pay creditors.

LandAmerica said it owed more than $650 million and was having difficulty paying creditors after a subsidiary that facilitated 1031 property exchanges invested proceeds in auction rate securities that had become insolvent (see story).

With LandAmerica’s three title insurance underwriting companies under its umbrella, Fidelity could expect to move ahead of rival First American Corp. and become the nation’s largest title insurer, controlling about 45 percent of the market.

Roadblocks to sale

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But before the Richmond, Va.-based bankruptcy court can approve the sale, the Nebraska Department of Insurance — which regulates Lawyers and Commonwealth — must sign off on the deal.

Nebraska regulators will hold a hearing Monday to rule on Fidelity’s application to acquire Lawyers and Commonwealth.

Stewart Title Guaranty Co. — the nation’s fourth-largest title insurer, with 12 percent of the market in 2007 — has also applied to the Nebraska Department of Insurance to acquire the underwriting firms.

A spokeswoman for Stewart Title said the company is making "many changes … to meet the market challenges today" but that the company could not comment on its application with Nebraska regulators, also scheduled for a hearing Monday.

Old Republic International Corp., the fifth largest title insurer, also submitted an application to acquire LandAmerica’s underwriters with Nebraska regulators Dec. 9, but withdrew the application Thursday.

In a motion asking the bankruptcy court approve the sale of its underwriting subsidiaries to Fidelity, LandAmerica acknowledged that it has been contacted by several companies interested in making competing offers.

LandAmerica said it "promptly granted these parties access to its electronic data room and its full cooperation" to help them prepare competing offers, but has yet to receive a "higher and better" offer than Fidelity’s.

Before filing for bankruptcy protection, LandAmerica had put together a store of more than 2,700 documents and tens of thousands of pages of due diligence materials in an attempt to negotiate a financial rescue or sale the company.

On Nov. 7, Fidelity announced an agreement to acquire LandAmerica Financial Group Inc. and all of its subsidiaries in an all-stock deal valued at $128 million, but pulled out of the merger on Nov. 21 at the end of a due diligence period (see story).

It was later revealed that on Nov. 18, the Nebraska Department of Insurance informed Commonwealth and Lawyers that it had determined the companies were in a "hazardous financial condition." On Nov. 26, a Nebraska court granted the department’s petition to place Commonwealth and Lawyers in rehabilitation.

Earlier that day, LandAmerica had filed for Chapter 11 bankruptcy protection and Fidelity announced it would acquire LandAmerica’s title insurance underwriting companies — but not the parent holding company and its debts — for $298 million.

The Nebraska Department of Insurance has continued to allow the companies to underwrite new title insurance policies under reinsurance agreements in which Fidelity assumes the risk. But LandAmerica warned the bankruptcy court that if the sale of the companies is not approved, Nebraska regulators could place the companies into "run-off," leaving LandAmerica with less money to pay off creditors.

"The carefully negotiated and agreed-upon terms and conditions of the (sale agreement with Fidelity) will provide a greater recovery for (LandAmerica’s) estate than would be provided by any other available alternative," the company said in a motion requesting a Dec. 16 hearing and approval of the sale.

Fair price?

But attorneys seeking to represent unsecured creditors in the case have filed an objection to the sale, saying "there are simply too many important, unanswered questions" to allow it to proceed "without considerable scrutiny."

LandAmerica, they say, hasn’t proved that $298 million represents the fair market price for Lawyers, Commonwealth and United Capital Title — or that the process through which that price was reached was fair and adequate.

Under Fidelity’s original agreement to acquire LandAmerica and all its subsidiaries for stock valued at $128 million, Fidelity would also have had to assume more than $650 million in debts, valuing the company and its subsidiaries at closer to $800 million, lawyers for creditors said.

In an attempt to "plug the liquidity holes" at LandAmerica 1031 Exchange Services Inc., LandAmerica Group appears to have transferred millions of dollars from the underwriting companies it now seeks to sell, lawyers for creditors said — noting $150 million in "intercompany obligations" owed to the underwriting companies.

Because the underwriting companies may turn around and assert claims to those funds in bankruptcy court, "a full understanding as to who has been protecting Land America Financial Group’s interests, as opposed to those of the underwriting companies … must be obtained before the sale can be approved," the creditors’ objection to the sale said.

"Fundamentally, the debtors are liquidating," attorneys for creditors claimed. "No payment to creditors will be made from future operations. The interests and opinions of creditors therefore, should be paramount."

Attorneys for creditors also protested that under the sale agreement, Fidelity will assume obligations to pay approximately $45 million in deferred compensation to LandAmerica executives, who would otherwise have to line up with other creditors and perhaps receive only a fraction of what they are owed.

With LandAmerica’s underwriting companies continuing to operate with the approval of Nebraska regulators, there is no rush to approve a sale, lawyers for creditors said. In their objection, they claimed to have been contacted "on several occasions by parties who have expressed an interest in purchasing" LandAmerica’s underwriting companies, and that a process "should be put in place to provide an adequate opportunity for other potential purchasers to bid."

Also objecting to a Dec. 16 sale to Fidelity is Beau Street Associates, which owns a 140,000-square-foot office complex in Washington, Penn. leased by CTG Real Estate Information Services, Inc.

CTG REIS is a subsidiary of Capital Title Group Inc., which LandAmerica acquired in 2006 for $252.6 million. Beau Street said it built the office complex after Capital Title Group guaranteed a $20.8 million, 10-year lease that commenced in 2007.

In a motion objecting to the sale, Beau Street claims LandAmerica has no right to sell United Capital Insurance Co., because the company’s stock is owned by Capital Title Group. LandAmerica has "strip mined" Capital Title Group of its assets, and intends to leave the company "behind as a shell," Beau Street claims.

Antitrust concerns

If the bankruptcy court does approve a sale of LandAmerica’s title insurance subsidiaries, the deal would also have to be approved by federal antitrust regulators.

In a Nov. 10 evaluation of the proposed merger, Keefe, Bruyette & Woods analysts Nathaniel Otis and William Clark said a merger of Stewart and LandAmerica would make for a "healthy industry," creating three companies each sharing roughly a third of the market.

But the KBW analysts saw Fidelity as "the logical partner" for LandAmerica, because LandAmerica’s debt load and Stewart’s "conservative balance sheet philosophy" would be "too big a hurdle" to overcome.

Fidelity Chairman William Foley has said the primary concern of antitrust regulators is control of real estate information and data at the county level. LandAmerica has largely relied on First American’s title records, he said, and only few of the company’s subsidiaries have their own title plants, so Fidelity is not expecting to face insurmountable antitrust issues.

Otis and Clark ruled out a takeover by First American, noting the company’s management was already on record as not wanting to expend capital to buy another title company as it continues to downsize.

The top five U.S. title insurance companies — First American, Fidelity, LandAmerica, Stewart and Old Republic — all lost money in the third quarter, as orders for title insurance plummeted and claims rose (see story).

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