Engine Capital Sends Letter to Dye & Durham’s Board of Directors Regarding its Concerns About the Company’s Rising and Excessive Leverage
September 11 2024 - 7:00AM
Business Wire
Highlights How the Company’s Two Recently
Announced Acquisitions Totaling C$69.3 Million Go Against the Board
and Management’s Previous Commitment to Reducing the Debt Load
Pro-Forma Leverage Is Back to Approximately the
Same Level as It Was Prior to the February 2024 Dilutive Equity
Offering Despite Leadership’s Repeated Promises to Drive Leverage
Below 4x
Engine Capital LP (together with its affiliates, “Engine” or
“we”), which owns approximately 7.1% of Dye & Durham Limited’s
(TSX: DND) (“Dye & Durham” or the “Company”) outstanding
shares, today issued the below letter to the Company’s Board of
Directors (the “Board”).
This press release features multimedia. View
the full release here:
https://www.businesswire.com/news/home/20240911332531/en/
***
September 11, 2024
Dye & Durham Limited 1100-25 York Street Toronto, Canada M5J
2V5 Attention: Board of Directors
Members of the Board:
We were incredibly disappointed by the Company’s recent Q4 2024
earnings announcement on September 4, 2024, which included news of
two additional acquisitions for a total consideration of C$69.3
million.1 These acquisitions are significant, representing around
7.5% of the Company’s market capitalization. While the Company is
trying to minimize the size of these acquisitions by highlighting
that the upfront payment is “only” C$21 million, the reality is
that the total consideration is much larger and includes C$44
million in deferred consideration which is just another form of
leverage. We felt blindsided because for the last few months that
we have interacted with Chair Colleen Moorehead, she has repeatedly
assured us that “the Board has no appetite for M&A” and that
“the Board’s priority is to reduce debt.” The Company’s latest
announcement flies in the face of these statements and compounds
its credibility issues with shareholders.
These new acquisitions are even more disappointing considering
the Board has consistently received feedback from many shareholders
since at least 2022 that the Company should prioritize debt
reduction over M&A. We know this feedback has been shared with
the Board based on presentations filed as part of the ongoing
litigation between the Company and one of its significant
shareholders, OneMove Capital, in the Ontario Superior Court of
Justice in Toronto (the “Court”). We have included some of those
slides, all of which are publicly accessible in the Court file, in
Appendix A. These slides make clear shareholders’ concerns
regarding Dye & Durham’s level of debt, the need to rapidly
reduce debt, the leverage profile, and the pace of acquisitions. In
a section titled “Broad investor concern regarding CEO
communications,” the second slide cites an example where management
publicly indicated a focus on debt reduction (including telling the
market the TM Group proceeds would be used to pay down debt) only
to announce acquisitions shortly thereafter. The bottom line is
that the Board is well aware of shareholders’ concerns but simply
does not care.
The example mentioned in this slide is very similar to recent
actions taken by the Board. After repurchasing 14.7 million shares
for an average price of C$15.22 per share in fiscal year 2023
(including through two Substantial Issuer Bids), the Board just a
few months later completed a highly dilutive equity issuance of
11.96 million shares at C$12.10 per share in February 2024. The
stated reason for this dilutive financing was to reduce debt. In
reality, shareholders were diluted to allow the Board to continue
its M&A spree, as just months later in August 2024, the Company
used some of those proceeds for new acquisitions. As a result of
these acquisitions, the Company’s level of debt has increased, and
its leverage profile has worsened despite the Board and
management’s claims that they are focused on reducing debt and
leverage.2
We also want to highlight the Company’s leverage ratio over the
last few quarters. Incredibly, pro-forma leverage following these
two acquisitions is now back to around the same level as it was
prior to the February 2024 dilutive equity offering despite
management’s repeated commitment to drive leverage below 4x as
quickly as possible.3
This M&A is also irresponsible, in our opinion, given the
heightened turnover of the management team. Over the last few
months alone, the following senior executives have departed the
organization:
- David Nash – Chief Product Officer (hired in July 2023)
- Aaron Eichenlaub – Chief Revenue Officer (hired in July
2023)
- John Robinson – CEO Financial Solutions Business, formerly
Global COO
- Wojtek Dabrowski – Chief People and Communications Officer
(hired in June 2022)4
- Charlie MacCready – Chief Legal Officer
- John Sulja – Chief Information Officer (hired in June
2022)
We wonder how the Board can continue to approve acquisitions
when the management team is in such turmoil, no matter how
compelling the purchase opportunity may seem. These are just a few
reasons why the Company’s shares continue to trade at a significant
discount to other technology companies or technology
consolidators.5 We contend that meaningful changes are required to
close this valuation gap. Shareholders deserve a Board and
management team that are patient, disciplined, rational – and
receptive to their feedback.
We believe documents filed with the Court as part of the
litigation explain why it has been so difficult to reach an
agreement with the Company. In an email summarizing an interaction
with a shareholder, former Chair Brian Derksen explained that the
Company’s CEO, Matthew Proud, would not agree to increase the size
of the Board because he was concerned about “dilution of
influence.”6 Given this comment, it is ironic that the Board has
accused Engine of trying to “take control of the Board” without
paying a premium (despite the fact that if Engine’s principal were
to be elected, he would only be one out of seven directors).
Dye & Durham under the leadership of the Board has become a
laughingstock of the Canadian capital markets. We are surprised the
Company’s directors are not concerned about their own personal
reputation and potential personal liability, as they continue to
fund more acquisitions and frivolous litigation against Dye &
Durham’s own shareholders, instead of focusing on reducing
leverage, as shareholders have now been asking for a while. We urge
the independent directors (Ms. Moorehead, Mr. Derksen, Ted Prittie,
Peter Brimm, and Ronnie Wahi) to stop the shenanigans and set a
date for the Special Meeting as soon as practically possible so
that shareholders can have their say.
Sincerely,
Arnaud Ajdler Managing Partner
No Solicitation
This press release does not constitute a solicitation of a proxy
within the meaning of applicable laws, and accordingly, DND
shareholders are not being asked to give, withhold or revoke a
proxy.
About Engine Capital
Engine Capital LP is a value-oriented special situations fund
that invests both actively and passively in companies undergoing
change.
1 Includes C$4.5 million in contingent consideration. 2 This
analysis includes deferred payments that were part of the
consideration for these acquisitions since these deferred payments
are a liability for the Company. 3 Leverage includes convertible
debentures and deferred considerations. Assumes acquisitions were
made at 10x EBITDA, per management’s commentary. 4 Mr. Dabrowski
may still work with the Company as a consultant. 5 “DND shares
currently trade at 8.3x C2024E EBITDA vs. legal SaaS at 19.3x and
tech consolidators at 18.8x.” Canaccord Genuity report published by
Robert Young and Max Ingram on September 5, 2024. 6 Court
filings.
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version on businesswire.com: https://www.businesswire.com/news/home/20240911332531/en/
For Investors:
Engine Capital LP 212-321-0048 info@enginecap.com
For Media:
Longacre Square Partners Charlotte Kiaie / Bela Kirpalani,
646-386-0091 ckiaie@longacresquare.com /
bkirpalani@longacresquare.com
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