Dye & Durham Limited (DND) Earnings Call Transcript & Summary

Good evening. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dye & Durham conference call addressing the acquisition of Link Group. And I would like to turn the call over to Ross Marshall, Investor Relations on behalf of Day and Durham. Mr. Marshall, you may begin the conference.

Thank you, operator, and good evening, everyone. Welcome to the Dye & Durham conference call. Before we start, we'd like to remind you that all amounts discussed on this call are denominated in Canadian dollars, unless otherwise indicated. Please note that statements made during this call may include forward-looking statements and information and future-oriented financial information regarding Dye & Durham and its business and disclosure regarding possible events. Conditions or results that are based on information currently available to management, which indicate management's expectation of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made as of this date hereof, and Dye & Durham assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results. A number of these risks or uncertainties could cause results to differ materially from the results discussed today. Given these risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the forward-looking statements and information in the future-orientated financial information section of our public filings, without limitation, our MD&A and our press release issued this evening for additional information. Joining us on the call today are Matt Proud, Dye & Durham Global CEO; Vivek Bhatia, Link Group CEO; and Avjit Kamboj, Dye & Durham Global CFO. There are slides on the Dye & Durham website under the Investors section that you can download that accompany this call. There are also slides on the webcast if you've dialed in there. A question-and-answer session will follow the formal remarks for research analysts. I will now turn the call over to Matt for opening remarks. Matt?

Thank you, Ross, and good evening, everyone. This afternoon, we announced we've entered into a definitive agreement to acquire Link Group, which trades on the ASX for approximately CAD 3.2 billion or AUD 5.50 per share. This acquisition will expand Dye & Durham's global footprint and position the company as a clear leader in B2B software and information service solutions. Like Dye & Durham, Link provides mission-critical software servicing more than 6,000 clients globally across the financial services and corporate business segments. The acquisition will broaden our product offering with a complementary set of solutions that serve adjacent markets to our existing products, extend our positioning on the value chain with law firms and financial service providers. This opportunity creates the possibility to cross-sell solutions into each of our 2 customer bases. Additionally, Link owns approximately 30 -- 43% interest in PEXA Group Ltd., or PEXA. PEXA is a publicly traded ASX company that trades under the symbol PXA. PEXA operates Australia's leading digital property exchange network and helps lawyers, conveyancers and financial institutions settle transactions and file documents electronically. The acquisition positions us to go to market with 3 businesses of significant scale. Our existing real estate and legal software solutions platform, Link's corporate market business, which provides a shareholder management and analytics and stakeholder engagement software and Link's retirement and superannuation solutions platform, which services pension funds in Australia, New Zealand and the U.K. These businesses are highly complementary and create opportunity to leverage respective customer bases and provide natural cross-sell product opportunities truly on a global scale. Link is a transformational acquisition for us. The acquisition will give Dye & Durham significant financial and operational scale across core geographies in Canada, Australia and the U.K. and adds revenue of AUD 1.2 billion and operating EBITDA of AUD 257 million as of June 30, 2021. For clarity, this excludes any financial contribution from PEXA. In addition to accelerating growth, the acquisition is expected to deliver identified cost synergies of CAD 125 million, delivering significant value to Dye & Durham shareholders. Of course, we may be able to drive additional synergies and efficiencies over time, further reducing our purchase price multiple. With this transaction, we continue to target a 5x EBITDA post-synergy multiple. We have clearly demonstrated we can deliver on our post-synergy acquisition EBITDA multiple in the past. For clarity, when measuring this 5x in this case, we are excluding Link's stake in PEXA. Under the terms of the agreement, the acquisition represents a 15% premium to the most recent closing price of Link at AUD 550 per share, which implies an acquisition multiple of 8.9x EV to EBITDA, again, excluding PEXA. In connection with the transaction, Dye & Durham has entered into a scheme implementation deed with Link whereby Dye & Durham will acquire all of the ordinary shares in Link by way of a scheme of arrangement between Link and its shareholders for cash consideration. The Link Board of Directors has unanimously recommended that Link shareholders vote in favor of the transaction, and we expect closing of this transaction in or around June 30, 2022. We've negotiated certain rights during the interim period, including the right to match superior proposals and break fees. The transaction will require 75% approval of Link shareholders and regulatory approvals, including but not exclusive of the Australian Foreign Investment Review Board and ACCC, the Financial Conduct Authority in the United Kingdom as well as other financial market authorities in certain countries. We have secured attractive financing to fund the transactions with Goldman Sachs, ARES and JPMorgan, who have committed to providing the AUD 3.5 billion of committed debt financing. Funds managed by ARES Management have also agreed to provide up to $950 million of equity investments, comprising of up to $840 million of nonvoting exchangeable preferred shares and up to $109 million of common shares issued at a price of $53 per common share or a 32% premium to our closing price of Dye & Durham as of yesterday. We believe this demand for Dye & Durham stock is more reflective of the intrinsic valuation of the business, and we intend to build forward momentum in our stock from here. Link is an attractive asset led by an experienced management team. Joining us this morning is Vivek, the CEO, who will provide us with a high-level overview of their business. Vivek, over to you.

Thanks, Matt, and good evening, everyone. Today is an exciting day for all of us at Link. We are a global technology-led company that serves clients in our core markets across Australia, the U.K. and Ireland, and we are growing in exciting markets like India and Hong Kong. We have built a business of scale over the last 16 years with revenue of nearly AUD 1.2 billion and an operating EBITDA of AUD 257 million. Approximately 85% of our revenue is recurring, and our average client relationship is more than 10 years, which speaks to the sticky nature and intense relationships we have with our 6,000-plus clients globally. Our core divisions, which drive the vast majority of our operating EBITDA are corporate markets, which connects issuers to their stakeholders through our software platform, providing shareholder management and analytics, stakeholder engagement and employee share plan products globally. We serve 37% of the ASX 300 and 34% of the FTSE 250 with share registry solutions. Our second core division is retirement and superannuation solutions, which is the largest in Australia, servicing more than 1/3 of all superannuation or pension members. We provide comprehensive financial data solutions, including data management and member management products to superannuation funds in Australia, New Zealand and the U.K. Each of these divisions are highly complementary to Dye & Durham's technology platform and broaden their product suite for existing clients in Canada and expand its customer base in key strategic markets in Australia and the U.K. Together, I believe we can leverage our collective experience in the financial services and real estate markets where a large customer base complements and uses each of those products. With that, I will turn it over to Avjit.

Thank you, Vivek. Good evening, and thank you for joining us today. This acquisition of Link will dramatically scale our existing business, which we've grown to approximately $450 million in run rate revenue and $250 million in run rate adjusted EBITDA based on our fiscal Q1 2022 results we just recently announced. It will also expand our ecosystem beyond legal and real estate and further penetrate our reach into the financial services providers. Although our current revenue is highly likely to reoccur from captive customer base, it is primarily transactional in nature. This acquisition, however, will transform our revenue streams such that more than half of the combined revenue will be comprised of recurring revenue. As Matt mentioned, this acquisition will position us to go to market with 3 businesses of significant scale, each exceeding $300 million in revenue. Our existing real estate and legal solutions platform, the retirement and superannuation solutions which services pension funds in Australia, New Zealand and the U.K. and the corporate markets business. In addition to this compelling suite of products, with the acquisitions, we will also indirectly own an approximate 43% in PEXA. From an accounting perspective, PEXA is not consolidated in Link's financial statements. And therefore, the EBITDA numbers being discussed today do not include any share of PEXA's EBITDA. The 2 additional businesses that Link currently owns, the banking and credit management and fund solutions are considered noncore assets to Dye & Durham. The banking and credit management business is expected to be divested prior to close of this transaction, and we expect to take steps to divest the fund solutions business following close. Because of this, we expect to record that asset as assets held for sale on our balance sheet at close from an accounting perspective. The Link acquisition will position Dye & Durham as a leader in B2B software and information services with significantly larger scale in Australia and the U.K. and a more diversified revenue mix from other markets like India, Hong Kong and New Zealand that rival the scale we have reached in Canada. This acquisition will also enhance our product offering without any duplication among products, but it services similar or the same customers, which provide us with opportunities to cross-sell. As an example, in the corporate market space, law firms often influence the selection of stock transfer agents and service providers, and we have an established relationship with most of the large law firms in Canada, Australia and the U.K. Link corporate market offers industry-leading products that are ideally aligned for this audience. In terms of our integration plans, we expect to achieve at a minimum $125 million in cost synergies. Assuming the transaction closes by fiscal 2023, which is the period ending June 30, 2023, we expect to generate the first $100 million in synergies, which is primarily related to cost efficiency, and we believe another $25 million in synergies are available from just cost in fiscal 2024 and beyond. And in an effort to help paint a picture of what we will look like on close of this transaction, we've plotted our combined company adjusted EBITDA. On this slide, you'll notice that gray bars represent our historical figures of Dye & Durham only. For our future periods, we have assumed the acquisition closes July 1, 2022, and Link starts contributing from that point forward. We have used the market consensus estimates for each of Dye & Durham and Link for the future periods and combine them to give you a better sense of the combined company performance. Based on the equity analyst modeling, adjusted EBITDA, including the $100 million in synergies I mentioned earlier, we achieved more than $700 million in adjusted EBITDA in fiscal 2023, which is a significant step towards our build to $1 billion strategy of achieving more than $1 billion in our adjusted EBITDA, and that is without any consideration for future acquisitions. Turning to the balance sheet. On the close of this acquisition, with the new debt financing package Matt discussed, our leverage ratio will be around 4x net of cash and net of investment in PEXA. This new debt financing package will replace the current $1.8 billion debt facility we have. As we've mentioned many times before, our current business is like a digital infrastructure type business, and Link business is no different. This gives us a highly predictable cash flow stream, which we expect to enable us to delever quickly and bring our leverage ratio down to below 4x net of cash and around 2.5x net of cash and net of investment impacts within 2 years after close at a minimum. With that, I will turn it back to Matt for closing remarks.

Thanks, Avjit. As Avjit touched on a few times, the scale of the pro forma business is important to us. Turning to Page 11 of the presentation titled pro forma business profile, it's evident on this graph, with this acquisition, Dye & Durham will become a global leader in B2B software information services solutions. The pro forma company will employ over 8,000 employees globally with Canada representing approximately 18% of global revenue. The U.K. and Ireland representing 21% of global revenue and Australia, representing 53% of global revenue. This speaks to the diversity and breadth of the business that we are building. Finally, turning to Slide 12. We are very serious about our build to $1 billion strategy. With this acquisition, we'll be close to $1 billion adjusted EBITDA which is our EBITDA objective that we set out. We plan to maintain our strategy to achieve this target within the near term. With that, I'll open it up for Q&A.

[Operator Instructions] And your first question will be from Robert Young at Canaccord.

A lot of data there in a short amount of time to synthesize here. But the last bit you were talking about the debt. So the previous balance sheet, the debt -- the delayed draw, the revolver, all of that is replaced essentially with this new facility. Is that correct?

That is correct, Rob.

Okay. And then you have a preferred -- I saw 2 numbers in the press release, and then you gave a different number on the -- in the call just a second ago, the amount that's coming from ARES. Could you go through that again? There's a preferred share and then there's an equity raise component. Could you split that again?

That is correct. So the total equity financing package is $950 million that is Canadian. Of which $841 million is in the form of exchangeable preferred shares. And then the remaining $109 million is common shares.

Okay. And then the -- maybe where I'll start on the businesses that you are going to spin out. You said that there are 3 businesses I don't understand that we split their business into 4. So there's -- what are the pieces that you're going to spin out? And what are you going to keep?

So the 2 businesses we are going to spin out, one is their BCM business, which they will sell prior to this transaction closing. The second is their Fund Solutions business which we will sell after the transaction closes. While we think Fund Solutions business is a good business and has a high -- a very high degree of very sticky reoccurring revenue or current revenue. It's not on strategy with what Dye & Durham does. And therefore, we don't -- we're going to divest of it post-close. That will leave us with 3 prongs to the Dye & Durham business. One being the corporate markets business that Link has, the other being Dye & Durham's existing business, legal business; and the third being the RSS business. We believe these businesses are very complementary to each other.

Okay. And the existing -- the legal business, is that the real estate component that you talked about at the very beginning of the call?

It's existing Dye & Durham business today.

Okay. And you said that there are 6,000 customers, is there any overlap?

There is overlap, yes. There is overlap.

Would substantially overlap with most of the customers that you already have include those 6,000 customers in Australia?

We would have a lot of those customers. There's also an ecosystem that exists that the law firms are part of and corporations are part of as well. These are core to what Dye & Durham -- it's core to what Dye & Durham does.

Okay. You have the CMA order in place in the U.K., and I think Link has some U.K. components. So maybe you could talk about whether there's any impact there or whether that limits some of the -- is the cost synergy that you're talking about between 2023 and 2024? Is that because of the CMA order? Or would there still be other opportunities above that?

No, that is not because of the CMA order. We do not believe the CMA order will have any -- we don't anticipate any negative effect on this. That is just a timing issue. The transaction is not going to close as we talked about until around the end of the fiscal year, so on June 30, and it will take us time to execute on synergies.

Okay. Avjit do mentioned that 50% of the revenue going forward is going to be recurring. What is recurring mean? Is this subscription revenue? Is it statistically reoccurring revenue? What is the...

It is contractual revenue.

And what would a typical contract be, how long would it be?

It varies by business line. Some of the bigger customers contracted 3 years, but really just varies by business and product line.

Is there anyone else in the queue? Should I -- do you want me keep going?

Yes, we do have other people in the queue. So maybe if you just queue back up, we'll go the next question.

Next question will be from Thanos Moschopoulos at BMO Capital Markets.

Regarding the Fund Solutions business, can you clarify what the EBITDA run rate of that business is just to gauge what you make disposal of that business?

Yes. It's between AUD 25 million and AUD 30 million. And we've seen business in that space trade at very high multiples recently.

Okay. And to clarify, banking and credit management, there is a buyer lined up. So we have a high degree of confidence that it will be sold before the transaction closes.

There's actually 2 potential buyers, so yes.

Okay. Regarding the synergies, to be clear, so that's $100 million on a full year basis for fiscal 2023. So I'm just trying to understand whether the synergies kind of ramp up during that time period, whether you're kind of entering the year at a full rate of that cost synergy? Just how do synergies kind of unfold?

So we anticipate we will realize $100 million in year. We have the next 6 months to work with the target to plan. We have identified a incompetent in that number. And the reason is just timing perspective, assuming we close July 1, it will take some time to execute. That's why we're only taking in $100 million or $125 million in year 1.

In terms of potential revenue synergies, is there a path to take some of those technology into other geographies? Or is that not part of what complete...

No. There is, and that is upside. We're not baking that into the synergies. We're being considerate, as we always have with our synergies and putting it with identified and what is actionable today.

Okay. And then just given we have enough time to look at this. What is Link's shareholder base look like in terms of just getting approval for the transaction? What would be required as far as the shareholder approval from the Link perspective?

Well, I mentioned it. It's 75%. But Vivek, I'll let you talk to your shareholder base.

Yes. Thank you. Thanks, Matt. Yes, I think as Matt said, it is by the scheme implementation deed according to the Corps Act in Australia, we need a 75% shareholder vote. Our shareholder base is considered -- is only institutional shareholders. Our top 20 would hold about 50% of our shareholding and they are generally value or growth stock institution funds. And as part of the scheme arrangement that we entered with Dye & Durham today, the Board of Directors will ensure, will pay as I said, unanimously recommend the deal to the shareholders and work with shareholders ahead of the shareholder vote.

Next question will be from Stephen Boland at Raymond James.

I guess I can ask you 30 questions, but I'll limit to 3, okay. So maybe the high-level question, Matt, is that there was press articles in Australia, probably 6, maybe 9 months ago, maybe a year ago that you were looking at just acquiring PEXA. And is this kind of the workaround solution that you wanted to acquire PEXA, you didn't get it. And essentially, you bought the parent company, making a couple of disposals and adding a business line. I don't want to be too -- is there any comment you can make on that?

That's absolutely not the case. Look, we like the -- and there's a lot of complementary product that link offers today. I mean if you look at Dye & Durham, everything surrounding corporations is a lot of what we do. So there's a natural ecosystem exists there and putting these businesses together with an overlapping customer base, we think makes a ton of sense. That said, we like the financial profile of PEXA and are glad to have it as an investment. But the merit of this rests on Link's existing business.

Okay. Okay. That's a good comment. And let's talk about retirement and superannuation because that is an extremely, I would say, commoditized business, but it's super competitive. You're not in that -- in any of the other, I don't believe, in U.K. or Canada. So this is another new business line in Australia. And so can you just talk about where Link is in terms of their market share, how competitive it is down there? And is that something that you think of expanding into the other jurisdictions that you're into?

So that is a -- I mean, a deeply embedded product. I wouldn't call it overly competitive. Link is by far the market leader in that space. And that business generates great cash flow that we can redeploy to drive a greater return for shareholders on. But I'll pass the call over to Vivek for a second to talk in a bit more depth, on what's the exact question you're asking.

Thanks, Matt. Yes. So I think as to what Matt said, we are undisputed market leader, 1 in every 3 Australian pension fund accounts serviced by us and some of the largest industry superannuation funds are our clients. And through them, we service more than 8 million member accounts. We also have grown in the U.K., where we are scheduled to reach almost 1 million members that we will service in the next few months. And again, as markets around the world move from defined benefits to defined contribution, that is where our forte lies. We have the ability to bring technology, scale, digital and data capability so that we can improve the interaction, the outcomes and the experience of the funds, the employers as well as the members themselves. And so there is a definite advantage in terms of competitive knowledge. And Australia has been in that cusp of the move from DB to DC about 20 years ago and quite a few countries are following it. So we do have some solid domain expertise that we can bring to other markets.

Okay. And I'll sneak another one in here. So you're issuing common equity to ARES at $53. Obviously, the stock price is not where you would probably want it to be with the deals that you've done that, would your profits have -- would have been to actually come to the market above 50-50, where the privatization is and issued more common equity. Would that have been the ideal capital mix that you would have wanted if things were more ideal in terms of your share price?

Well, look, I mean, I think ARES putting in equity at $53 is more indicative of the value of the business. And that said, the pref shares are convertible at $60. And so I think given where the stock price is trading there, we wouldn't want to issue at this price. But look, there's a bright future ahead of us. Once this deal closes, or should the deal close, we will be from an EBITDA perspective, the fifth biggest tech company on the TSX. If you look at the top 14 EBITDA of companies, we're the only one growing between fiscal '19 and '23 at over 100% EBITDA CAGR. Some of the highest margins, I believe, like there's great characteristics and growth profile in this company and you're seeing a demonstrated track record of execution. So we do take some time to prove it to the market. And I think as the results come online, we've demonstrated we can show. We think that we will have upward momentum. But because of that, and we're not there yet, we didn't want to issue equity at the current price.

Okay. I'm going to sneak one more, and I apologize. I never do this, but the U.K. regulatory review that's going on, I know this business is outside of the core conveyance business that you want to review for. So you don't believe this will have any impact on -- I know it's probably after the review, but you don't believe this will impact that review that's going on in terms of the conveyance business with the business that you're acquiring with Link. Is that a fair comment?

It's a separate regulator. And so no, we do not -- the 2 are not related.

Next question will be from Paul Steep at Scotia Capital.

Great. Matt, can you just go over again the regulatory approval process? Obviously, you need to get shareholder approval, but the various regulatory bodies down there. And I didn't hear anything in regards to approval of the transfer of ownership of PEXA. Is there a regulatory review baked in on that as well?

My understanding is no to later question you asked. For the other regulatory approvals, I named a couple of them. It's firm where the foreign investment would be more in Australia. Australia's ACCC, which is a competitor -- their competition authority. The FCA in the U.K. And then there's a bunch of other financial conduct authorities in various jurisdictions that we'll have to provide approval for the transaction to happen. But a lot of the stuff is ordinary course approvals that are sought and these transactions are already taken.

Great. And then maybe for, I assume, Vivek -- Link business, can you just talk when we look through the numbers, maybe some of the impacts that you've seen either from COVID or other impacts on the business just in terms of the 2 lines we care about maybe over the last couple of years just to refresh our memories to the way we look at it and think about revenue growth and margin, what you've been doing. If you could give us a quick snapshot, that would be great.

Thank you. The businesses have been incredibly resilient. And the 2 businesses that we are talking about being RSS and Corporate Markets have been incredibly resilient through the COVID period. The only impact has been in the corporate market businesses in the U.K. because of interest rate drops, and as interest rates have gone to all-time lows that obviously has had an impact on margin income. But apart from that, probably a bit of loans in activity and corporate actions activity, that has rapidly picked up over the last 6 months or so. So the diversification of geographies of our product lines as well as the strong client relationships have meant that the revenues have shown through -- with incredible resilience through the COVID pandemic.

Great. Last one for me, just to clarify as well. On the business that Link's got to bid for, those -- you're not netting out the sales of those because it doesn't look like there's a firm agreement on the BCM business, it just looks like an announcement. I just want to make sure we're all clear on where that's in terms of data...

The shareholders of Link will keep the proceeds of that business, the upfront proceeds that are obtained between announcement today and close in approximately June.

[Operator Instructions] Next is a follow-up from Robert Young.

Just quickly on the $125 million of cost synergy. I mean you were careful to say it was cost synergy, careful to say it didn't include PEXA. And so -- but at the beginning, you also talked about cross-sell opportunities. Maybe is there any revenue synergy to think about here? Or is that just outside of what you're talking about, today?

No, there is. We just announced the transaction today, recognizing revenues and as we see a lot of opportunity, and we identify those opportunities. It does take more planning and execution. And so as we look towards close, we'll have a better understanding of that. But today, we're comfortable talking about the cost side.

Okay. And maybe just one for Vivek. The -- you laid out a road map for fiscal '26. Is there anything that would be different that we should think about today relative to when that road map got laid out?

Not really, I laid that road map in the first week of November. So there has been 8 weeks or so that have transpired since, but I think that the businesses, as I called out at that point of time had very good foundation blocks. And we are at the bottom of the cycle in the market. We do believe that there is a great opportunity for us. And I am of the opinion that the transaction announced today gives us the opportunity to work with a world leader and create an enviable position in the market for B2B software information services. So I genuinely believe that this is a great combination and I think will further provide impetus to that growth story.

Thank you. And at this time, we have no further questions. Gentlemen, please proceed.

I believe that concludes the call. Thank you, everyone.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.