Constellation Software to make big purchase: RBC Capital

The probability of a major acquisition by Canadian software serial acquirer Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU) looks to have increased, according to analyst Paul Treiber of RBC Capital Markets.

Toronto-based Constellation, a vertical software-focused company, announced on Monday that its Perseus operating group has entered into a binding commitment with Intercontinental Exchange (ICE), which owns the New York Stock Exchange, and Black Knight, an analytics firm for the mortgage lending, real estate and capital and secondary markets spaces, to acquire Black Knight’s Optimal Blue unit, which has data analytics services to the mortgage industry. 

Constellation said it has agreed to pay US$700 million for Optimal Blue, through US$200 million in cash and US$500 million through a 40-year promissory note at seven per cent interest.

“Completion of this transaction is subject to the closing of ICE’s acquisition of Black Knight, the closing of Constellation’s acquisition of Black Knight’s Empower loan origination system (LOS) business entered into earlier this year in March, and other customary closing conditions,” Constellation said in a statement.

Last year, ICE agreed to acquire Black Knight for US$13.1 billion, and in owning Black Knight, ICE would become the largest mortgage software provider in the United States. Earlier this year, the US Federal Trade Commission called for a temporary block of the deal on antitrust grounds. 

But according to a Globe and Mail report, Treiber said Optimal Blue has been a sticking point for the FTC, meaning that if ICE has agreed to sell the business to Constellation, there’s more likelihood that the Black Knight deal — and thus the CSU deal for Optimal Blue — will come to pass.

“With Black Knight now divesting both Empower and Optimal Blue to Constellation, we believe the probability of both acquisitions closing has increased,” Treiber said.

Constellation shares closed up 1.7 per cent on Tuesday, and at $2,798 per share, the stock is now up about 32 per cent year-to-date.

Treiber has a “Buy” rating on CSU and 12-month target of $3,200, while the average analyst rating on Constellation is a “Strong Buy.”

Constellation Software, which is set to release its second quarter earnings on August 11, posted 34 per cent year-over-year revenue growth in its first quarter 2023, with two per cent coming from organic growth. Net income attributable to shareholders was $4.44 per diluted share compared to $4.63 per share a year earlier, while free cash flow available to shareholders in the Q1 was $453 million compared to $324 million a year earlier.