Deal dead; firm’s future precarious

There is no Thanksgiving for LandAmerica Financial Corp. this year.

The corporate shell that was to have transferred the venerable Henrico County-based insurer to a Florida competitor was to be called Thanksgiving Corp.

The Nov. 7 merger agreement with Fidelity National Financial Inc. had offered LandAmerica a way out of a financial jam caused by the housing market collapse that has already taken down several financial giants. For $128 million, Fidelity would have acquired a competitor that had $3.7 billion in revenue last year.

The deal broke down Friday night when Fidelity, which had a due-diligence period to examine LandAmerica's books, opted out.

"It is my understanding that Fidelity's termination of the merger agreement had more to do with pessimism over the real estate economy than it did with anything specific to LandAmerica," said LandAmerica spokeswoman Lloyd Osgood, declining to comment further.

Fidelity did not elaborate on its decision and its spokesman could not be reached for comment.

Etti Baranoff, an associate professor of insurance and finance at Virginia Commonwealth University, said the merger was at first considered positively, with the stock of both companies soaring on Nov. 7. The combined company, which would have been based in Jacksonville, Fla., would have been a powerhouse in title insurance with about half of the market, she said.

LandAmerica also would have benefited from the government's $700 billion financial bailout that originally was to purchase toxic mortgage-related debt that was causing credit markets to freeze. But on Nov. 12, Treasury Secretary Henry M. Paulson Jr. announced that the funds would be used to prop up banks and consumer credit instead.

"It appears that in today's climate, it is very risky to acquire a competitor that is almost as large," Baranoff said. "The uncertainties going forward and the changes in the bailout plans were probably the key factors in the decision to not go forward with the merger."

LandAmerica makes its money by insuring the title to property -- it pays out if a title search misses any claims on the property you bought -- and when there are lots of real estate deals, the company has lots of business. It hasn't lately.

But it has also been squeezed by a venture into one of the new markets for complicated new financial paper that imploded this year.

This year, the company's cash flow from operations turned negative, which means it spent more actual dollars running its business than it received from it. That means the company has had to dig into its savings just to pay its bills.

It also put its two main lines of credit -- allowing it to borrow up to $250 million -- at risk since it no long met the conditions its lenders had imposed.

That means it can't use the $50 million remaining in one of the lines.

Even before a really rough fall, LandAmerica's financial stresses led its bankers to boost interest rates by a half a percentage point, to as high as 7.2 percent.

All in all, its credit squeeze means that without the Fidelity merger or some way of stanching the cash drain and getting back into the black, "it could have a material adverse effect on our financial position and our ability to continue as a going concern," LandAmerica said in a filing this month with the Securities and Exchange Commission, using one of the more dire warnings companies can put in one of those filings.

LandAmerica is squeezed, too, by its venture into auction-rate securities. They are a kind of interest-paying investment that became popular as a way holders -- whether wealthy individuals or financial firms like LandAmerica -- could keep income they earn roughly tracking general interest-rate trends. The securities have long lives, but brokers promise to have auctions at least once a year at which holders could sell out or renew or expand their holdings if they chose.

But that market collapsed in February, one of many that locked up when cash-strapped brokers felt they could not long handle the risk of being stuck with securities if an auction didn't go well.

"Auction-rate securities are the . . . notes that used to be deemed as safe as cash," said Kent Engelke, chief economic strategist for Capitol Securities Management in Richmond. "In February, that market just froze up. A company could have a billion dollars in them and just can't get at it."

LandAmerica used the auction-rate securities to park funds it held for customers. Basically, the company promised to hold money customers received from selling property until they bought new real estate, in order to avoid a hit for capital-gains taxes on the sale.

The subsidiary that handled those deals holds auction-rate securities with a face value of just under $235 million that it can't do anything with -- even though it needs to pay out to customers funds it used to buy those securities.

During the three months ended Sept. 30, LandAmerica transferred $20 million in cash to the subsidiary to cover such payouts. Since then, it advanced an additional $45 million.

LandAmerica won permission from the Nebraska Department of Insurance, the primary regulator for its title insurance companies, which are legally domiciled in that state, to give them $89 million of those securities in exchange for $70 million in cash. The regulator agreed with the company that the investment-grade "A" rating of the securities meant they were safe enough for the insurance companies to keep on their books, waiting for the market in them to resume.

"If they have to kick money from the holding company to a subsidiary because of an illiquid investment . . . to do anything, that industry is highly regulated," Engelke said.

Ultimately, what triggered the collapse of the auction-rate securities market was fallout from the housing-market slump, which also hammered LandAmerica's main line of business.

So far this year, revenue from title insurance fell 30 percent. The company slashed its second-biggest expense for the business -- salaries and benefits -- by even more with a 33 percent cut reflecting the more than 11,400 layoffs it made this year. All told, the company now has about 9,270 employees, about 5,260 fewer than at the beginning of 2007.

Its biggest single expense, agents' commissions, fell 22 percent this year, while claims payments actually increased 30 percent, mainly as an after-effect of the defunct real estate boom that sent home prices soaring. More expensive houses mean bigger claims if the title isn't clear.

Fidelity has weathered the housing meltdown with less stress that LandAmerica, managing a cash outflow from operations one-third less than the Richmond company's on a business that is more than 60 percent larger.
Contact David Ress at (804) 649-6051 or .

Business Editor John Hoke contributed to this report.