Banking & Finance

Why Intercontinental Exchange Is Paying $11 Billion to Acquire Ellie Mae

After markets closed on Thursday, Intercontinental Exchange Inc. (NYSE: ICE) announced that it had signed a definitive agreement to acquire privately held cloud-based mortgage finance company Ellie Mae in a transaction valued at approximately $11 billion. Ellie Mae is owned by private equity firm Thoma Bravo, which paid $3.7 billion to acquire the firm in February 2019.

Intercontinental is the parent company of the New York Stock Exchange and six central clearinghouses in Europe, as well as the ICE futures exchanges in the United States, Canada and Europe. The firm also owns MERS, the Mortgage Electronic Registration Systems, a database that maintains a confidential electronic registry of U.S. mortgage originations. MERS tracks transfers of and changes to servicing rights and ownership of mortgage loans.

Ellie Mae provides a platform that helps automate the closing of mortgage loans, especially for nonbank mortgage lenders.

According to the announcement, Intercontinental will pay 84% of the purchase price in cash and issue new stock for the remainder. The company plans to issue $9.25 billion in new debt to meet the cash portion of the deal. At the end of June, Intercontinental reported $7.5 billion in net debt.

The acquisition is expected to add pro-forma revenue totaling around $900 million to some $200 million in expected revenue in ICE’s mortgage services segment. Pro-forma adjusted earnings before interest, taxes, depreciation and amortization are expected to increase by about $470 million to around $600 million for the year. Intercontinental expects the acquisition to be accretive to adjusted earnings per share in the first full year of ownership.

In the announcement, Intercontinental said the addition of Ellie Mae to its mortgage services business “will provide innovative technology that touches nearly every U.S. mortgage.” By one estimate, some 5.5 million mortgage originations will occur in 2020.

Shares of Intercontinental traded down about 2% in Friday’s premarket session, at $95.50 in a 52-week range of $63.51 to $101.93. The stock’s consensus price target is $107.69, and the company pays a dividend yield of 1.23%.