Fidelity National Financial Inc. has called off its plan to acquire troubled rival LandAmerica Financial Group Inc., the companies said Friday, a development that casts doubt on LandAmerica’s long-term prospects.

Fidelity and LandAmerica both issued terse statements at 8 p.m. Eastern Time Friday saying Fidelity had exercised its right to back out of the deal during a due diligence period.

LandAmerica lost $599.6 million during the third quarter and was in danger of defaulting on its debts, the company said in a recent regulatory filing.

Fidelity announced an agreement on Nov. 7 to acquire LandAmerica in an all stock deal valued at $128 million (see Inman News story).

Based on their 2007 market share, the combined companies might have controlled about 45 percent of the U.S. title insurance business. By comparison, the nation’s biggest title insurer, First American Corp., had a 30 percent market share last year.

But the merger agreement gave Fidelity until Nov. 21 to conduct a due diligence review of LandAmerica’s books, allowing Fidelity the option to back out of the deal if it unearthed any surprises.

When plans for the merger were announced, Fidelity Chairman William Foley said the negotiations were held in just days, which didn’t allow the company to conduct the required due diligence.

The deal was announced on a Friday. The following Monday, LandAmerica detailed record third-quarter losses and said the company was in violation of financial debt covenants of its note-purchase agreement and credit agreement (see story).

LandAmerica said it was in discussion with creditors to obtain waivers. If not waived, the covenant violations "constitute an event of default under the agreements, giving the lenders the right to declare all principal and accrued interest payable immediately," LandAmerica said at the time.

A declaration for immediate payment under either agreement also would constitute an event of default under LandAmerica’s convertible note obligations, the company said, enabling the holders of the notes to demand immediate payment.

A LandAmerica spokeswoman did not immediately return a call Friday evening.

In a statement, LandAmerica Chairman and CEO Theodore L. Chandler Jr. said the company was disappointed with Fidelity’s decision to call off the merger. He said the company’s attention "remains focused on strengthening LandAmerica’s business and exploring strategic alternatives during these incredibly difficult economic times."

In a Nov. 10 evaluation of the proposed merger, Keefe, Bruyette & Woods analysts Nathaniel Otis and William Clark viewed Fidelity as "the logical partner" for LandAmerica. They saw several reasons another company would not offer a competing bid.

A merger of Stewart and LandAmerica would make for a "healthy industry," creating three companies each sharing roughly a third of the market, the KBW analysts said. But Otis and Clark thought LandAmerica’s debt load and Stewart’s "conservative balance sheet philosophy" would be "too big a hurdle" to such a deal.

The KBW analysts ruled out a takeover by First American, noting the company’s management was already on record as not being interested in expending capital to buy another title company, "a very logical move given the success the company is having right-sizing its own expense base."

During the downturn, title insurers have struggled to cut expenses fast enough to keep pace with declining orders and rising claims. Industry leader First American reported a $8.3 million third-quarter loss, despite having cut 5,800 employees since the beginning of last year.

Fidelity closed 115 title and escrow offices and laid off 1,000 workers during the third quarter alone, as rising claims forced the company to strengthen reserves by $261.6 million and pushed Fidelity to a $198 million loss.

LandAmerica unexpectedly postponed the release its third-quarter earnings before announcing plans to merge with Fidelity.

Otis and Clark believed there was "a good chance that other industry participants could have been solicited by (LandAmerica) at the same time as (Fidelity), given what appears to be a grave enough situation as to warrant delayed (third quarter) earnings and a sense of urgency to have a deal in place prior to their release."

But at the time, the KBW analysts also thought one reason other companies would be discouraged from putting in a competing bid for LandAmerica was that with a merger agreement in place, any competing bid would be viewed as a hostile offer.

Now that Fidelity has backed out of the deal, at least one obstacle to a merger with another company has been removed. 


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