Dye & Durham Ltd. is the latest target for New York activist investment firm Engine Capital LP, a hedge fund that pushes for changes at companies it believes are undervalued.
The acquisitive, heavily indebted legal software provider said in a release Friday evening that it had received a letter requisitioning a meeting of its shareholders from the 11-year-old hedge fund, and that it would review and consider the request before commenting further.
“The company welcomes the opportunity to engage with all shareholders, including Engine Capital,” Toronto-based D&D said.
The D&D release also said chair Brian Derksen would not stand for re-election at its next annual meeting, and that company director Colleen Moorehead will take over his position at the company’s next board meeting.
D&D DND-T has not shared the contents of Engine’s letter publicly, but a source familiar with the matter said the hedge fund, which owns 5.1 per cent of its stock, stated in the March 10 letter that it wants three of the seven seats on the company’s board. The letter is seen as the opening of negotiations between the two and might not necessarily lead to a proxy fight.
The Globe and Mail is not identifying the source, as they are not authorized to publicly discuss the matter.
Engine states on its website that it “often constructively engages with management teams and boards of directors to create value for the benefit of all shareholders,” meaning it doesn’t immediately launch into a public campaign to go after its targets.
Engine has also been pushing Calgary’s Parkland Corp. to take measures to improve shareholder value for the past year. The hedge fund did not respond to messages from The Globe.
“It’s a discussion with an engaged shareholder who wants to see the stock price go higher,” Wojtek Dabrowski, a spokesperson for D&D, said on Monday. “That’s a common stance for most shareholders.”
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. It closed Monday at $15.50 on the Toronto Stock Exchange, up 2.9 per cent on the day. That is still about 15 per cent lower than one year ago, and less than one-third of peak levels attained in June, 2021 – mirroring broader trends among many publicly traded tech stocks.
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 in Canada – 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 54 per cent of its $455-million in the 12 months ended Dec. 31. But it also has $1.06-billion in non-current debt, including a credit facility with Ares Capital Management, plus $271.9-million of convertible debentures. That gave it a debt-to-operating earnings ratio above five times at the end of the calendar year.
Even after receiving proceeds of $139.5-million from a bought-deal stock offering in February, D&D’s leverage fell to 4.7 times this year’s adjusted operating earnings, according to Canaccord Genuity analyst Robert Young.
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. The increase was mainly owing to higher interest expenses and higher loan balances. D&D also incurred extra financing costs on a stock buyback and private placement last fall.
“That’s a fairly high debt service, and it makes a lot of people uncomfortable, particularly for a growth-oriented technology company,” Mr. Young said in an interview. Engine’s activist push “may cause D&D to be more aggressive on debt paydown and less aggressive on mergers and acquisitions.”
D&D has taken measures in recent months to lighten its financial burden including reducing its convertible debenture balance, 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.
Sean Silcoff