A second activist investor is targeting legal software provider Dye & Durham Ltd DND-T.
The Toronto company said Monday it had received notice from Blacksheep Fund Management that the Irish hedge fund may nominate its chief investment officer to join D&D’s seven-person board at its next scheduled shareholder meeting Aug. 20.
That meeting was called after New York hedge fund Engine Capital LP wrote D&D last month requesting the removal of three directors – Brian Derksen, Colleen Moorehead and Leslie O’Donoghue – and proposing three of its own nominees to replace them.
After receiving the letter, 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 and the board are committed to acting in the best interests of the company and all of its stakeholders and, as previously stated, welcome the opportunity to engage with all shareholders,” D&D stated in a release, adding it had retained Goldman Sachs as strategic adviser. Company spokesman Wojtek Dabrowski said in a text message “we’ve got nothing to add” to the release.
The new challenge to the highly acquisitive, heavily indebted company led by chief executive officer Matt Proud comes days 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 for the past year, while Blacksheep targeted Toronto-based telecommunications company Tucows Inc. for similar reasons starting in 2022.
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 – and it spiked to above $17 briefly after pricing its refinancing early this month. The stock has since fallen back to around $15.50, well off its 52-week high of $21.21, and less than one-third of peak levels attained in mid-2021.
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 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 last week.
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.
“The debt is probably the biggest thing that catches a lot of attention” from investors, Canaccord Genuity analyst Robert Young said in an interview. “There’s still a lot of debt even after the refinancing.” He added some investors would also “like to see the company go a bit slower” on acquisitions “and show them the underlying cash flow of the business.”
Sean Silcoff