Fidelity Terminates Agreement to Buy LandAmerica

Neither company was able to return a call to GlobeSt.com in time for publication. Both issued terse statements announcing the deal is off.

"We are disappointed with Fidelity's decision," LandAmerica Chairman and Chief Executive Officer Theodore L. Chandler, Jr. says in a prepared statement. "However, our attention remains focused on strengthening LandAmerica's business and exploring strategic alternatives during these incredibly difficult economic times."

LandAmerica's stock dropped dramatically on the news--by some 88%--to 53 cents. If the acquisition had gone through, a Fidelity subsidiary would have established a $30-million credit facility for LandAmerica. Now the company is facing "serious liquidity constraints," according to Fitch Ratings, which has downgraded the Insurer Financial Strength ratings of LandAmerica Financial Group's insurance subsidiaries to 'BB' from 'BBB+'. Fitch has also downgraded the Issuer Default Rating of LandAmerica to 'B' from 'BBB-' and placed it and its subsidiaries on Rating Watch Negative.

LandAmerica is going to need a buyer with enough cash to fill its short-term liquidity needs, which are substantial, judging from Fitch's analysis. The rating agency notes that LandAmerica has approximately $290-million invested in auction-rate securities as part of its 1031 exchange business that cannot be accessed right now. Also, LandAmerica is unable to access the $50-million remaining under its bank line of credit, Fitch says. Fitch also reports that the company's title insurance subsidiaries' consolidated statutory surplus has dropped to $300 million as of Sept. 30, 2008, from $426 million at year-end 2007. Surplus has been depleted by operating losses and dividends to the holding company and consequently, Fitch's estimate of LandAmerica's risk-adjusted capital ratio is substantially below 100%.

For these reasons, A.M. Best did not care for the acquisition from Fidelity's perspective when it was first announced. In a research note issued at the time of the deal's announcement, A.M. Best noted that the acquisition would require "a significant transfer of liquidity from Fidelity's title insurance subsidiaries to Land America's leading statutory entities in order to partially pay down Land America's outstanding debt, which may result in adversely impacting the financial strength and risk-adjusted capitalization of Fidelity's title insurance members. Additionally, the acquisition is expected to carry execution risks of integrating two large insurance organizations."

It is that latter point--the execution risks--that may well have derailed the deal, A.M. Best rating analyst Neil Das Gupta, tells GlobeSt.com, adding that he cannot say with any certainty. "Fidelity was looking for savings of about $150 million from the deal," he continues. "I don't know if they realized that they couldn't achieve that, but it was part of the due diligence." For whatever reason, he says, Fidelity decided the deal wouldn't bring enough value to the table.