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Dye & Durham Ltd. DND-T shares shot up Monday after the legal software company announced it might sell non-core assets in order to pay down debt.
Stock of the Toronto-based company closed up 12.5 per cent on the Toronto Stock Exchange. Before markets opened, it said had hired Goldman Sachs GS-N and Canaccord Genuity Corp. CF-T to advise on a strategic process in which it could sell non-core assets, including its financial services infrastructure business.
That unit commands high margins and a strong competitive position in its markets, with less cyclical revenue than the company’s other businesses, BMO Capital Markets analyst Thanos Moschopoulos wrote in a research note. He estimates the business generates about $60-million in annual operating earnings, or more than 20 per cent of the total amount, a figure the company does not break out.
Mr. Moschopoulos said he’d rather see companies known for expanding through acquisitions “get bigger, not smaller,” but added given that Dye & Durham has been trading at a relatively low multiple of 6.5 times the ratio of enterprise value owing primarily to concerns over the company’s debt levels, that selling the financial infrastructure business “would be likely to unlock value.” The company’s stock last month hit its lowest levels since the company went public in July, 2020, at a time when many other tech stocks continue to trade well off their pandemic-level highs.
The company now has a borrowing leverage of 5.1 times net debt to forecast 2024 operating earnings including its convertible debentures. Chief executive officer Matthew Proud said in an interview his company’s goal is to reduce that to below four times “as soon as possible and ideally well below in that in the longer term.”
Mr. Proud said while the company’s financial services business has performed well, “We get the public market wants less debt. You can grow the revenue and operating earnings and it takes a long time, or you can sell non-core assets and do that a lot quicker. That’s what we’re trying to do in an expedited fashion. Resetting our balance sheet to a lower leverage point by selling non-core assets makes a lot of sense because it lets us continue on our strategy.”
Dye & Durham recently hiked prices on dozens of its services in its core Canadian, British and Australian markets. In the instance of its eCore unit, one of two Ontario government authorized service providers for obtaining provincial business entity documents, it was the third time that division had raised list prices since the spring of 2022 after leaving them changed since before its 2017 purchase of its parent company.
The increases were part of an internal review and affected some products whose prices hadn’t changed in years. While price increases aren’t unique to Dye & Durham – many other legal software consolidators have also increased prices after making acquisitions – its sharp increases met with outcry from clients because of their size and scope. The hikes, sometimes by hundreds of percentage points, prompted dozens of complaints to the Competition Bureau of Canada and a class-action lawsuit, although an Ontario Superior Court judge last spring declared in a procedural ruling “there is no real evidence” the lead plaintiffs suffered loss of business. Prices for those real estate services, now offered through Dye & Durham’s Unity platform, didn’t change in the recent wave of increases.
Concerns over reduced competition and high fees prompted Britain’s Competition and Markets Authority in 2022 to force the company to divest its purchase of legal software provider TM Group (U.K.) Ltd., which it did in July.
Dye & Durham has said the complaints haven’t translated into any notable loss of business.
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