Intercontinental Exchange to Acquire Ellie Mae, Share Rise

Intercontinental Exchange, Inc. ICE has agreed to purchase mortgage-software firm Ellie Mae from private equity firm, Thoma Bravo. The deal is expected to close in the third quarter or early fourth quarter of 2020 after it receives Hart-Scott-Rodino (HSR) review and clearance.

Shares of Intercontinental Exchange gained 3.6% in the trading session of Aug 7, reflecting investor optimism on the pending acquisition.

About Ellie Mae

Founded in 1997, CA-based Ellie Mae is a leading enterprise digital lending platform and B2B network, which aids non-bank lenders, credit unions, investors and banks to automate the full mortgage origination workflow. Its cloud-based platform connects thousands of industry participants for nearly half of all U.S. mortgages. It is embedded in customer workflows, thus offering mission critical solutions that drive customer savings as evidenced by 95%+ retention rates on Encompass.

The key products of Ellie Mae are Encompass, Network, Capsilon, Velocify, and AllRegs. Ellie Mae has generated $900 million revenues so far in 2020. Revenues grew at an 11-year CAGR (2008-2019) of 30%.

In April, 2019, it was acquired by Thoma Bravo, LLC, a leading private equity investment firm, in an all-cash transaction that valued Ellie Mae at an aggregate equity value of approximately $3.7 billion.

Financing the Deal

The deal is valued at an enterprise value of $11 billion. The price includes $1.75 billion of newly issued stock of ICE, as the company is known, and $9.25 billion cash.

Rationale Behind the Transaction

The buyout of Ellie Mae will transform the mortgage marketplace of Intercontinental Exchange. It will also enhance the acquirer’s growth strategy in mortgage technology, with complementary products. The customers and stakeholders will leverage the core and proven expertise of Ellie Mae in operating networks and marketplaces. It will improve loan quality and bring increased transparency to mortgage industry participants and leverage ICE Data Services’ expertise and network to create content and distribute real-time data and analytics

The acquisition will establish Intercontinental Exchange as the leading provider of end-to-end electronic workflow solutions serving the U.S. residential mortgage industry. The acquirer will get the opportunity to monetize a $10 billion total addressable market (TAM) that spans the full mortgage lifecycle.

The technology provided by Ellie Mae assists its clients to achieve greater levels of consumer engagement, efficiencies through automation and a modernization of the loan manufacturing process through its recent introduction of machine learning and artificial intelligence.

The acquisition of Ellie Mae is expected to increase adjusted earnings per share in the first full year of ownership, realize run-rate cost synergies of $50 million to $65 million by the end of third year

Intercontinental Exchange expects ICE Mortgage Services to bring in $1.1 billion in revenues in 2020, including Ellie Mae’s expected annual revenues of approximately $900 million.  It also estimates ICE Mortgage Services pro-forma 2020 adjusted EBITDA of about $600 million including estimated 2020 Ellie Mae adjusted EBITDA of about $470 million.

As far as Ellie Mae is concerned, the acquisition will enable it to work closely with Simplifile and MERS, which will boost its digital mortgage business.

Inorganic Growth Story

Intercontinental Exchange boasts a compelling inorganic growth story. Ellie Mae will add to its growing presence as a major workflow solutions provider for the U.S. residential mortgage industry. Intercontinental Exchange had acquired a majority stake in the national electronic registry service Mortgage Electronic Registration Systems (MERS) in 2016, purchasing the remainder in 2018. It followed that deal with the acquisition of Simplifile, which acts as an electronic liaison between lenders, settlement agents, and counties, for $335 million, in 2019. The company operates MERS and Simplifile through ICE Mortgage Services.

This is the third acquisition Intercontinental Exchange has made to expand its mortgage services division. The company has invested about $11.5 billion in its strategy to automate the mortgage workflow. In the first half of 2020, Mortgage services revenues surged 104.2% to $98 million driven by the acquisition of Simplifile.

Price Performance

Shares of this Zacks Rank #3 (Hold) company have outperformed the industry in a year’s time. The stock has gained 9.8% compared with the industry’s increase of 1.2%.

Stocks That Warrant a Look

Some better-ranked stocks from the security and exchange sector include MarketAxess Holdings Inc. MKTX, PRA Group, Inc. PRAA and MoneyGram International Inc. MGI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MarketAxess operates an electronic trading platform that enables fixed-income market participants to trade corporate bonds and other types of fixed-income instruments worldwide. It surpassed estimates in each of the last four quarters, with the average surprise being 2.49%.

PRA Group is a financial and business services company, engaged in the purchase, collection, and management of portfolios of nonperforming loans in the Americas, Australia, and Europe. It surpassed estimates in each of the last four quarters, with the average surprise being 38.8%.

MoneyGram International provides money transfer services in the United States and internationally. It surpassed estimates in two of the last four quarters, with the average surprise being 14.8%.

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