U.K. regulators again hamper Dye & Durham global expansion plans

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For the second time this year, a British regulator has complicated Toronto legal software consolidator Dye & Durham Ltd.’s DND-T global expansion plans, throwing its largest-ever deal into doubt.

The company is in the latter stages of closing its purchase of Sydney-based Link Administration Holdings Ltd. for 2.34 billion Australian dollars (about $2.09-billion), after receiving clearance last week from Australia’s competition and consumer commission, which required D&D to sell its existing Australian businesses acquired in 2021 for a combined $248-million. Link shareholders approved the takeover last month.

But on Monday, D&D said it had received a warning notice from Britain’s Financial Conduct Authority that the regulator wouldn’t approve the acquisition of Link’s fund solutions business included in the deal unless the buyer undertakes to cover a shortfall of up to £306-million ($465-million) related to its role in the meltdown of the LF Woodford Equity Fund in 2019.

Australian competition regulator says it won’t oppose $1.67-billion Link buyout by Dye & Durham

Link administered the £3-billion fund, which collapsed in 2019 after its British namesake, star stock picker Neil Woodford, was forced out and it was unable to repay investors after enduring heavy redemptions. Lawyers representing thousands of investors have launched legal actions against Link; the company has said it did nothing illegal and will vigorously defend itself.

D&D said the nine-figure obligation would be related “to any restitution and/or redress payments that the FCA may levy” on the Link unit to cover any shortfall in the value of its assets.

The FCA’s notice could threaten D&D’s Link acquisition, announced in late 2021, which has proceeded against a backdrop of deteriorating market conditions for tech companies. D&D has already negotiated a 12.5-per-cent price cut on the deal with Link, dropping the original deal struck at 5.50 Australian dollars per share last December to 4.81 Australian dollars in July.

“This adds some incremental uncertainty regarding the timing of the Link transaction, and/or the probability that the deal proceeds,” BMO Capital Markets analyst Thanos Moschopoulos said in an interview, calling the development “unexpected.”

D&D said in a statement that while it supports any outcome that results in Woodford fund holders receiving proper compensation, it is “currently assessing the impact of the proposed condition” from the regulator. If the company is unable to accept the FCA’s final order, a condition in the takeover deal “would not be capable of being satisfied.” D&D said it is now in “active discussions with Link Group to find a resolution.”

Link’s Australian-listed shares fell by 20 per cent Tuesday to close at 3.58 Australian dollars, after being halted Monday.

In its most recent audited financial statements, Link disclosed it had made no provision for contingent liability. D&D said the process to determine restitution or liability “is still underway and no determinations in that respect have been made” as the FCA’s proposed conditions are preliminary. The Canadian company declined further comment.

D&D has not disclosed how much the added liability could add to its purchase costs after factoring out any liability insurance recoveries Link could make, or the potential values of assets within the unit it could sell.

The notice comes just over a month after the U.K.’s Competition and Markets Authority ordered D&D to sell a British property-search software company it bought in 2021 for $156-million after finding earlier this year that the takeover would reduce competition and lead to higher prices for software users.

D&D has also faced a backlash in Canada for its strategy of buying up providers of real estate software and then sharply increasing prices, sometimes by hundreds of percentage points. The strategy has prompted dozens of complaints to Canada’s Competition Bureau and a class-action lawsuit, and law firms have had little choice but to pass the costs on to property buyers.

The company was an early star of the COVID-19 pandemic as its stock price shot up after it went public in the summer of 2020. But its shares have lost two-thirds of their value this year, weighed down by a crash in values for tech companies, concerns over property transaction volumes as rising interest rates cool the Canadian housing market, and uncertainty related to its Link acquisition and potential divestitures.

D&D shares closed at $14.43 on the Toronto Stock Exchange Monday, down 1.8 per cent.

Mr. Moschopoulos said, “All else equal, I’d prefer to see the Link deal happen because it would provide some additional diversification to D&D’s business.” He added that, deal or no deal, there wouldn’t be much impact on the stock’s valuation.