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Hedge fund Engine Capital LP has stepped up its activist shareholder campaign against Dye & Durham Ltd. DND-T, laying out its case for the first time publicly Thursday after saying its behind-the-scenes efforts to “work constructively with the board fizzled out.”

Engine, which owns 6.6 per cent of the Toronto company’s stock, released a letter to other shareholders Thursday signed by managing partner Arnaud Ajdler in which he said he was “compelled to publicly raise our concerns about Dye & Durham’s underperformance and strategic missteps.” Those include its underperformance relative to the TSX Composite and Nasdaq Composite Index over the past one and three years and since its initial public offering nearly four years ago.

Mr. Ajdler accused the company of being a poor allocator of capital, saying it had paid too much for acquisitions, bought back shares and months later issued stock at a lower price, mismanaged the refinancing of $345-million in convertible debt and made “unnecessary” expenditures totaling $134-millinon related to acquisition, restructuring and other costs over the last three years. That cumulative cost “is an exorbitant number that reflects the frenetic pace of capital market activity under the current board.”

Engine’s managing director said D&D had set “the wrong long-term operational target” by targeting $1-billion in earnings before interest, taxes, depreciation and amortization (EBITDA), saying that the measure “incentivizes acquisitions – even if they don’t create shareholder value. There should be no pressure on management or the board to reach an arbitrary target.”

He wrote the D&D board needed to change its incentive structure to optimize return on invested capital, focus on growing revenues from existing businesses “and consider acquisitions in a measured and disciplined way.”

D&D replied in a release that “Engine continues to display a stunning lack of understanding of the key value drivers” of its business. It accused the hedge fund of “grossly” mischaracterizing its track record and performance, saying the company “is performing extremely well.”

D&D has called a special shareholder meeting for Aug. 20 at the behest of Engine, which previously requested the removal of three directors – Brian Derksen, Colleen Moorehead and Leslie O’Donoghue – and proposed three of its own nominees to replace them.

After receiving Engine’s letter earlier this year, D&D announced Mr. Derksen, its chairman, would not stand for re-election and that Ms. Moorehead would take over his position in the interim. The company has since received notice from a second activist hedge fund, Ireland-based Blacksheep Fund Management, which said it may nominate its chief investment officer to join D&D’s seven-person board at the meeting. The TSX-listed company has retained Goldman Sachs as a strategic adviser.

Mr. Ajdler said he still hopes to reach a “constructive resolution” but warned he was concerned the board would “resort to scorched-earth tactics” including frivolous legal actions against Engine and other shareholders. He declined an interview request.

The new challenge to the acquisitive, heavily indebted company comes after D&D closed a US$905-million debt refinancing that gives it financial breathing room, pushing out key repayment dates by several years and cutting annual interest costs by $20-million.

Both Engine and Blacksheep have previously targeted Canadian companies. Engine has been pushing Calgary’s Parkland Corp. to take measures to improve shareholder value, while Blacksheep targeted Toronto-based telecommunications company Tucows Inc. for similar reasons.

D&D’s stock has rebounded after sinking to an all-time low of $7.46 last October – below its July, 2020, initial public offering price of $7.50. The stock spiked to above $17 briefly after pricing its refinancing early this month but has since fallen back, closing Thursday at $14.55, well off its 52-week high of $21.21, and less than one-third of peak levels attained in mid-2021. Mr. Ajdler noted the stock’s valuation relative to EBITDA was “nearing an all-time low and lingers at a significant discount to peers.”

The company has specialized in buying up legal software providers in Canada, then hiking fees for such services as property transfers. It has also pursued acquisitions in other markets, including Britain and Australia, though it was forced to divest from TM Group (UK) Ltd. last year after Britain’s competition regulator found that D&D’s purchase of the company would substantially reduce competition among suppliers of software to handle real estate property search reports.

D&D’s fee increases here, sometimes in the hundreds of percentage points, have drawn the ire of clients and even prompted a proposed class action lawsuit, which was dismissed last fall by an Ontario Superior Court justice. Lawyers typically pass on the higher fees to customers.

More recently investors have been troubled by D&D’s high debt levels. D&D generated adjusted operating earnings of $250-million, or 55 per cent of its $455-million revenue in the 12 months ended Dec. 31. Net financing costs in its fiscal second quarter ended Dec. 31 were $49.1-million, or 44.5 per cent of revenues, up from 36 per cent of revenues a year earlier. Its ratio of debt to operating profit in the 12 months ended Dec. 31 was 6.3, deemed “high” by Moody’s Canada in a recent report, although that was before D&D raised $139.5-million in a bought deal stock offering in February and completed its debt refinancing this month.

D&D has taken other measures in recent months to lighten its financial burden by reducing capital and operating costs and launching a strategic review of non-core assets with an eye to potentially divest its financial services infrastructure business. Its goal is to reduce its debt-to-adjusted operating earnings ratio to less than four times.

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