SCOTTSDALE, AZ-Capital Title Group Inc., the 25-year-old, locally based title insurance underwriter, is now part of Richmond, VA-based LandAmerica Financial Group, the largest provider of title insurance in the US. Under terms of the $248.3-million transaction, LandAmerica has acquired 100% of Capital Title's common stock for net cash of about $199.3 million and about 776,000 shares of LandAmerica common.

Capital Title stockholders have until 5 pm Friday to decide if they will take cash or stock from the deal. The transaction calls for 80% of Capital Title shares to be exchanged for $8 in cash per share and 20% being exchanged for 0.12 shares of LandAmerica common per share.

Capital Title common opened yesterday on Nasdaq-Global Select Market at $7.96 per share. LandAmerica opened on the NYSE at $64.69 per share.

Fitch Ratings of Chicago thinks the deal will hurt LandAmerica in the long run and has downgraded its long-term issuer default rating by one notch to BBB and its senior debt to BBB minus. The financial strength of LandAmerica's six subsidiaries have been downgraded to A minus.

"The downgrade reflects Fitch's ongoing concerns about LFG's ability to profitably execute its acquisition strategy and the size of the purchase price premium relative to earnings and reported book value," according to Fitch's rating announced immediately after last Friday's closing. Fitch places the value of the deal at $251 million versus the $248.3-million value noted by LandAmerica and Capital Title in their prepared statement.

Fitch analysts Douglas M. Pawlowski and Gerry Glombicki maintain the purchase price "appears high, relative to Capital Title Group's annualized 2006 net earnings of $6.4 million and tangible stockholders' equity of $70 million." However, the analysts concede Capital Title Group's earnings over the most recent four quarters were "better at $15 million."

The analysts added "the time of the acquisition comes as the title insurance industry enters a downturn and would weaken LFG's balance sheet by adding to financial leverage and significantly increasing intangibles, which lowers the quality of capital."

LandAmerica president and CEO Theodore L. Chandler Jr. has a different view on the deal. "Capital Title is an ideal fit for LandAmerica," he says. "This acquisition strengthens our presence in the growing [real estate] markets of the West and Southwest and adds scale to our Lender Services platform." Chandler says the transaction is expected to be accretive to earnings per share in 2007 by about 2% to 3%.

Chandler adds that, based on public filings made by title insurance companies for 2005, "it is expected that the addition of Capital Title will increase LandAmerica's title market share to more than 27% in Arizona, nearly 16% in California and more than 19% in Nevada."

Donald R. Head, chairman, president and CEO of Capital Title, sees the completion of the deal as "a historic step forward" for Capital Title. "By joining forces with LandAmerica, we're able to offer our current and future customers the national resources and breadth of services of a Fortune 500 company that shares our commitment to superior service," he says. Under the restructuring of the two companies, Head will report to Chandler and be responsible for Capital Title's "smooth integration" with LandAmerica, Chandler says.

To pay for the cash component of the deal, LandAmerica issued $100 million of its senior notes, series E, according to the previously disclosed note purchase and master shelf agreement with Prudential Investment Management Inc. and other purchasers. Keefe, Bruyette & Woods advised LandAmerica in the notes transaction. Miller Capital Markets LLC, a Phoenix-based investment banking firm, represented Capital Title.

LandAmerica's subsidiaries also include Commonwealth Land Title Insurance Co., Commonwealth Land Title Insurance Co. of New Jersey, Land Title Insurance Co. of Pasadena, Lawyers Title Insurance Corp., Title Insurance Co. of America and Transnation Title Insurance Co.