I recently wrote an article on Old Republic International (ORI), highlighting my case for assessing the proper value of ORI. During the time of writing this article the company issued a press release explaining their plan to spin-off their mortgage and CCI business lines (the RFIG subsidiary). The company held a conference call, which you can listen to at the company's website and read the transcript of here.
Conference call summary
To be clear, there are still some unknowns, but the conference call highlighted the basic idea behind this move. The main points from the call are as follows:
- This is a partial leveraged buyout (partial as the ownership being bought is only 20.6%). The newly spun-off entity (RFIG) is priced such that the LBO will have a 20.6% ownership interest in RFIG. This means that of the new entity, if the LBO (which includes some current ORI employees and some insurance industry veterans) owns about 20%, then the ORI shareholders will own about 80%.
- This should have no impact on the debt covenants on the remaining convertible debt.
- On the mortgage insurance side of the business, should the company want to re-enter the market (i.e. write new premiums) they would really only be able to do so through one of the 3 MI subsidiaries in the near future.
- The LBO is providing very little capital into the spun-off business.
- There is some type of a "true-up" mechanism that should reward shareholders should the spun-off entity price higher than where the company priced it initially.
- This will be at some level a taxable transaction to the shareholders, as this will be considered a dividend in kind.
- The spin-off will likely be concluded by late June to mid July 2012.
- Litigation exposure related to the MI business, would go to the RFIG business. However, potentially excess litigation exposure related to the CCI business could end up being a liability to ORI (to the extent it is valid/real exposure).
Impact on my valuation
While the share price popped on this announcement, it doesn't really change the valuation I placed on the company (low end of the valuation around $11 per share). In fact, what the company is doing is creating a path to help achieve the real value of the title and general insurance business lines, which was the primary basis of my valuation. So the real positive impact I see is it will make it clearer that the run-off business lines are separate from the other business lines and show better the performance of the other business lines (title and general). The only real potential impact to my valuation could be a higher multiple on the remaining book value because of this newly found clarity.
Disclaimer: This article should not be taken as investment advice, and is for informational purposes only.
Disclosure: I am long ORI.