Dye & Durham Ltd. DND-T has sold a company it was forced to divest by Britain’s competition regulator, in a deal that could see the Canadian legal software provider almost recoup its original cost.
Toronto-based D&D said Monday it had agreed to sell TM Group (UK) Ltd. to German alternative asset investment firm Aurelius Group for which it will receive £50-million ($85.5-million) in cash at closing, expected next month. That compares with the £91.5-million ($156-million) D&D paid for TM two years ago.
However, D&D could receive another £41-million ($70.1-million) in potential earn-out payments from now until 2026, bringing it close to the original amount it paid.
The deal “removes a bunch of noise” for the company, Canaccord Genuity analyst Robert Young said in an interview. “It was something that has been going on in the background and dragging on for a while.”
While the first payment is less than the $100-million he was expecting, Mr. Young noted the £50-million upfront price, at a roughly 8.5-times multiple to the unit’s operating revenues, is a premium to where D&D’s shares trade. The company said it would use the proceeds to reduce its $1.29-billion in debt, which is 3.8 times Mr. Young’s forecast operating earnings for the next 12 months.
“Any debt paydown is welcome and would take out some of the risk in the short run,” Mr. Young said, given weaker Canadian housing-sale volumes in recent quarters, which affect revenues.
D&D closed Monday at $19.18, up 6.85 per cent on the Toronto Stock Exchange.
The divestiture followed Britain’s Competition and Markets Authority finding last year that D&D’s purchase of TM would eliminate one of the largest suppliers of software used by real-estate professionals to order property-search reports in England and Wales and would result in “substantial lessening of competition.” The regulator ordered the divestiture, one of two setbacks for D&D last year, including the demise of its attempted multi-billion-dollar purchase of Australia’s Link Administration Holdings.
After initially disputing the British regulator’s findings, D&D chief executive officer Matthew Proud said he was content with the deal’s outcome and the ability to move on.
”Look, it’s a good outcome, we were able to get a credible buyer, we were able to get a good deal, and use the proceeds to de-lever, which is one of our priorities,” Mr. Proud said in an interview. In terms of achieving the full £41-million earnout, he said: “There is a shot we can get it, but it’s not a slam dunk. We were trying to structure for maximum value for our shareholders.”
In contrast with the British regulatory environment, D&D has had a free hand to consolidate the market in Canada, with acquisitions followed by sharp fee hikes for similar real-estate transactions. The price increases have prompted an outcry from many of its lawyer customers, an attempted class-action lawsuit, complaints to Canada’s competition regulator and expansion efforts by its much smaller rivals.
There is nothing wrong with D&D’s actions according to Canada’s dated Competition Act, which favours mergers of domestic companies even if those deals result in less competition and more expensive transactions, in order to give the combined companies more heft to expand internationally. The 1985 law is under review, and Competition Commissioner Matthew Boswell has argued current regulations lag far behind other countries and are “no longer fit for our modern economy” as they allow “anti-competitive business mergers, creating more concentrated markets, and as a result, higher prices for Canadians.”
D&D remains an acquisition machine, making 18 purchases since it went public three years ago, although Mr. Proud in January said his company would take a breather from pursuing big takeovers and focus on smaller deals given the macroeconomic uncertainty.
Mr. Proud has persistently argued his company, whose revenues and operating earnings have been hit by declining real-estate-transaction volumes, is undervalued. The company has slashed costs and bought back stock over the past year. D&D has forecast it will earn revenue of $120-million, and operating earnings between $65-million to $70-million, in its fourth quarter ended June 30, both down year over year.