Hold off on Dye & Durham, this portfolio manager says

Canadian software company Dye & Durham (Dye & Durham Stock Quote, Charts, News, Analysts, Financials TSX:DND) continues to slide just days after a potential go-private offer was scuttled. The move brings new uncertainty to the stock, according to portfolio manager Chris Blumas who says investors will be better off seeing where management is headed.

Toronto-based Dye & Durham, a cloud-based software and solutions company for the legal and financial services sectors, announced last week that a special committee to the board has recommended that it turn down a $2.8 billion offer made by a management group in May. 

The offer by a group of executives was intended at $50.50 per share for DND whose share price shot up over the back half of 2020 from $11.49 to as high as $50.91 by late December. The stock was around the $42 mark last week before the announcement, with the company concurrently announcing the recapitalization of its credit facilities to help repay amounts outstanding under its current term loan facility. DND closed trading on Tuesday down almost six and a half per cent to $36.85.

“The Special Committee provided its final report to the Board wherein it recommended that Dye & Durham continue to pursue its existing business strategy which contemplates further growth through acquisitions under the leadership of Mr. Mathew Proud, the Company’s Chief Executive Officer. The Special Committee’s recommendation has been accepted and endorsed by the Board,” read the statement from Dye & Durham on October 8.

The end result is a company and stock where it’s not clear what comes next, says Blumas of Raymond James Investment Counsel, who spoke on BNN Bloomberg on Tuesday.

“There’s been a lot of news lately about Dye & Durham. A management team approached the board about doing a leverage of management buyout. They’ve rejected that and they … are going to try to run this business as a consolidator going forward,” Blumas said.

“They do get a lot of negative publicity just in terms of acquiring companies and then raising prices, but this is one that I would just wait a little bit more on and see how a little bit of the governance of this one unfolds,” he said. “Typically, when a management team forms a syndicate to buy out a company and that doesn’t work, they don’t stay on as kind of leaving the company.”

With the recapitalization announcement last week, DND provided a corporate update saying the company was granting about 6.9 million stock options to its CEO, which could bring Proud to 11.8 per cent ownership of the company when all is said and done. Dye & Durham said the move was “to further align the interest of the CEO with that of shareholders.”

Dye & Durham reported fourth quarter and full-year fiscal 2021 numbers in August, showing revenue climbing 219 per cent for the year to $208.9 million. The jump was the result of higher transaction volumes, increased revenue from acquisitions and the realization of revenue synergies. At the same time, DND’s 2021 net income dropped from negative $11.2 to negative $40.8. For the company’s fourth quarter fiscal 2021, revenue rose 494 per cent to $84.4 million and net income was a positive $6.3 million.

“Software is a wonderful business and they’re in a very, very great space [but] I would just look for a little bit more clarity on what the operating strategy is going forward and if these option grants were one time or they’re something that’s likely to repeat,” said Blumas.

As far as the impact of a seasonality on DND goes as we enter the busy fourth quarter and holiday season, Blumas said the impact is likely less intense on a company like Dye & Durham. 

“With this you see a lot less seasonality,” he said. “My recollection is they go more with the software as a service subscription model, so that takes a little bit of a seasonality away from this type of a software business.”

“This has been a second options grant in a while for them since their IPO, and as a percentage of of shares outstanding it was close to nine per cent. So, I would just wait a little bit on this and wait for a little bit more clarity on the strategy longer term and the compensation framework longer term,” he said.

On Dye & Durham’s new credit facility, the company said it will be comprised of a $1.52 billion initial term loan, a $200 million delayed draw term loan and a $75 million revolving credit facility. Dye & Durham said along with repaying amounts under its current term loan it would use the remaining amounts for, among other things, further acquisitions.

Earlier this year, DND closed on the acquisition of Australian software company GlobalX for $159 million as well as UK-based real estate due diligence solutions provider tmgroup for $156 million.