ICE deal risks giving private equity a good name

ICE agreed to buy mortgage processor Ellie Mae at an enterprise value of $11bln

  
A trader walks below screens showing the current price of Intercontinental Exchange (ICE) on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 20, 2020.

A trader walks below screens showing the current price of Intercontinental Exchange (ICE) on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 20, 2020.

REUTERS/Lucas Jackson

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

NEW YORK - It’s hard to believe a chief executive isn't overpaying if he hands over multiples of what an M&A target was worth just over a year earlier. It’s even harder to believe if the seller is a private-equity firm. That’s the position Intercontinental Exchange boss Jeffrey Sprecher is in with his agreed purchase on Thursday of Ellie Mae.

At an enterprise value of $11 billion, the mortgage processor is worth three times what Thoma Bravo paid for it 16 months ago. The buyout firm put in around $2.2 billion of equity. Strip out the almost $1.8 billion Ellie Mae borrowed to finance the rest of the transaction from the price ICE is paying, and Thoma Bravo is sitting on a fourfold return on its money. It’s taking almost $1.8 billion of its winnings in ICE stock.

That sounds like flipping an asset to the next mug. But the sale makes sense for Sprecher too. Some external factors help. Interest rates at virtually zero are good for both the business and the buyer. ICE will only pay around 2% on the $9.2 billion it’s borrowing. And more people are buying homes or refinancing mortgages – the second quarter was the best since 2003, according to Inside Mortgage Finance.

That level is probably not sustainable, but Ellie Mae’s role in the mortgage chain may well be. It focuses on automating and shortening the usually tortuous mortgage-application process. The pandemic has made that kind of technology even more appealing – and often necessary. An under-the-hood overhaul last year that shifted everything onto the cloud has helped, too.

Ellie Mae’s revenue has been growing at a speedy clip, up by around a fifth in 2019 to some $600 million. The top line could hit $900 million this year, with an adjusted 52% EBITDA margin.

That income is likely to hold up better than mortgage lending itself, giving Sprecher comfort in the price he paid. He knows he could have snapped up Ellie Mae far more cheaply a couple of years ago, admitting to investors on Thursday that he held back as he didn’t think it would switch so well to cloud-based technology. But Thoma Bravo helped bring out the underlying strength of Ellie Mae’s business. It’s almost enough to give private equity a good name.

CONTEXT NEWS

- The Intercontinental Exchange on Aug. 6 agreed to buy mortgage processor Ellie Mae at an enterprise value of $11 billion. The exchange operator is acquiring it from private-equity firm Thoma Bravo, which bought the business in April 2019 at an enterprise value of $3.5 billion.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Richard Beales and Amanda Gomez)

© Reuters News 2020

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