Dye and Durham Ltd. announced its biggest acquisition late Tuesday, saying it had agreed to buy publicly traded Australian technology vendor Link Administration Holdings Ltd. for $3.2-billion in cash.
It’s one of the largest acquisitions in recent years by a Canadian technology company and continues a record year for cross-border transactions in the sector, both of, and by, Canadian technology companies, according to Refinitiv. It would also make D and D one of Canada’s largest public technology companies by operating earnings.
Shares of Dye and Durham rallied following the news, closing at $46.27 on Wednesday, up 11.3 per cent on the day on the Toronto Stock Exchange.
The deal comes weeks after the highly acquisitive Toronto company, which specializes in providing software to the legal industry, bought Telus Communications Inc.’s payment solutions unit for $500-million, and a year after it bought DoProcess LP, Canada’s largest provider of real estate practice-management software, from OMERS-owned Teranet Inc. for $530-million. The deal is at least the 13th by D and D since it went public on the Toronto Stock Exchange in July 2019 and the latest in a spate of acquisitions that has taken it to other English markets, notably the UK and Australia.
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“We’re trying to build a global company here,” D and D CEO Matthew Proud said in an interview, noting the combined company will have 8,000 employees and derive less than 20 per cent of pro-forma revenues of $1.25-billion from Canada.
At the same time, D and D structured the deal in a way that reflects his ongoing frustration about the company’s share price. His belief the company’s stock is chronically undervalued prompted Mr. Proud to lead a management buyout earlier this year, which the board turned down, instead offering him a rich options package that shareholders approved earlier Tuesday.
D and D said it would pay $5.50 (Australian) per share, a 15-per-cent premium to Link’s closing price on Tuesday, funding the deal with a C$3.25-billion senior secured term loan provided by financial institutions led by Goldman Sachs Bank, J.P. Morgan Chase Bank and hedge fund Ares Capital Corp., which will replace existing credit facilities.
In addition, Ares agreed to buy C$950-million worth of equity at a significant premium to D and D’s share price. That includes $109-million of common shares at $53-apiece, 27.5 per cent higher than its close Tuesday, which Mr. Proud said on a conference call to announce the deal “is more indicative of the value of the business.”
Link is a much larger company than D and D, with $1.2-billion (Australian) in annual revenue (about C$1.1-billion) and $257-million (Australian) in operating earnings. By contrast, D and D had C$208-million of revenue in its fiscal year ended June 30 and was generating revenue at an annualized rate of $450-million on Sept. 30.
The deal will further transform the Canadian company into a global player, with Australia and New Zealand accounting for about 55 per cent of its pro-forma revenues if the deal closes. It would also broaden the company’s offerings beyond real estate and legal software into two new areas: providing financial data products to pension and superannuation funds and millions of their members in Australia, New Zealand and the U.K.; and cloud-based software for corporate issuers, including shareholder management and analytics. Link has 6,000 customers, including more than one-third of companies on the ASX300 and FTSE250 indices in Australia and the UK, respectively.
Link also owns 43-per-cent of publicly traded PEXA Group Ltd., which operates a digital property exchange network in Australia, and which D and D was believed to be eyeing earlier this year. Two other units are planned for divestment, one before the deal closes, and one after, D and D said. The company said it would have opportunities to cross-sell services between its different, non-overlapping businesses, a rationale that consolidators typically offer when they make acquisitions in unrelated areas to their core business.
Link’s board has unanimously recommended its shareholders vote for the deal, which is structured similarly to a Canadian court-approved plan of arrangement. The deal will require 75 per cent shareholder support as well as regulatory approvals and isn’t expected to close until mid-2022. The Canadian company has the right to match any higher offers that Link may receive.
In a research note, BMO Capital Market analyst Thanos Moshchopoulos wrote “At first look, we think the deal makes financial and strategic sense, and we believe it should be highly accretive” to D and D’s share price. However, he said “given potential deal risk” he expected its stock to trade well below levels it would command if the combination were to succeed based on recent multiples.
Mr. Proud forecast that with the deal, D and D would be able to increase adjusted operating earnings from $116-million in its last fiscal year to $701-million two years hence. The company said it would realize C$125-million in cost synergies after the deal closes, though it declined to break out specifics.
But the company has also drawn controversy for its pattern of buying dominant software vendors to lawyers and then sharply increasing prices. Earlier this month, Britain’s competition regulator warned it was “concerned” the Toronto company’s July $156-million purchase of TM Group (U.K.) Ltd., which sells software that real estate professionals use to order property-search reports in England and Wales, “could lead to a reduction in competition.” The review comes on the heels of D and D acquisitions of legal-software providers in Canada that were followed by price hikes of as much as 563 per cent. That provoked an outcry from several of its real estate legal-practitioner customers and dozens of complaints to the Competition Bureau of Canada, The Globe and Mail reported earlier this year.
Asked if he planned to extend D and D’s strategy of hiking prices to Link’s customers, Mr. Proud told the Globe that “is not part of the strategy here. This is about providing value to customers. We’ve not taken any revenue synergies in our business case.”
The deal was announced on the same day shareholders expressed disapproval at Dye and Durham’s annual general meeting for the board’s decision to award Mr. Proud a massive equity award composed of millions of new options and stock appreciation rights following an end to talks of a management buyout. The two members of the board’s compensation committee, chairman David MacDonald and Mario Di Pietro, drew markedly fewer votes in support of their re-election to the board, with 66.3 per cent and 52 per cent, respectively, well below the other five men standing for election. In addition, shareholders voted down a resolution to grant 600,000 stock options to the company’s directors, with 50.9 per cent voting against. However, just under two-thirds of shareholders did vote in favor of the options grant to Mr. Proud.
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Sean Silcoff