Shares of Duff & Phelps (DUF) ended 2012 on a strong note. Shares of the independent financial advisory and investment banking firm rose 19.7% to $15.62 per share on the final trading day of the year. The firm decided to sell itself to a consortium of private equity firms for $15.55 per share.
Duff & Phelps announced that the firm has agreed to sell itself to a private equity firm consortium comprised out of The Carlyle Group, Stone Point Capital LLC, Pictet & Cie and the Edmond de Rothschild Group. The consortium will pay $15.55 per share in cash, valuing the firm at approximately $665.5 million.
The deal represents a 19.2% premium to the closing price before the announcement of the deal, and represents a 27.3% premium compared to the average trading price in the month leading up to the announcement of the deal.
CEO Noah Gottdiener commented on the deal, "Duff & Phelps Board of Directors, acting on advice from the Company's legal and financial advisors, agrees that this transaction is in the best interest of our stockholders, who will receive an immediate and certain cash premium for their shares. Importantly, the transaction will be structured to preserve the firm's independence as we serve our clients in the future."
For the full year of 2011, Duff & Phelps generated annual revenues of $396.9 million. The company net earned $18.6 million for the year. At its latest quarterly report, the company reported $46.8 million in cash and equivalents and $17.5 million in long-term debt, for a net cash position of almost $30 million. Consequently, the offer values the firm's operating assets at 1.6 times annual revenues and roughly 34 times annual earnings.
The deal is expected to close in the first half of 2013, and is subject to ordinary closing conditions, including shareholder and regulatory approvals.
Results So Far In 2012
For the first nine months of 2012, Duff & Phelps generated revenues of $339.6 million, up 25% on the year before. Net income attributable to shareholders came in at $16.2 million, up almost 40% on the year before.
At this rate, full year revenues could come in around $450 million, on which the company could earn $21-$22 million. This values the firm at 1.4 times 2012 full year revenues and 29-30 times annual earnings.
Some Historical Perspective
Shares of Duff & Phelps started the year of 2012 around the $15 mark and hovered around that price for most of the first half of that year. Shares fell back to $11 in November, bouncing back to $15.62 at moments after the announcement of the deal.
Over the last five years, shares of the company have moved in a wide $10-$20 trading range. Annual revenues came in just below the $400 million mark over the past years, while net income more than tripled to $18 million last year. At the same time, the number of shares outstanding increased significantly.
I guess that some shareholders are in doubt whether to tender their shares at these levels. Shares traded at these levels as recent as last summer, and the 19% premium is not that impressive.
Yet, CEO Gottdiener defends the move by providing shareholders an immediate and certain premium for their shares, which is not the most convincing argument given that shares traded around these levels just 6 months ago.
There is a little hope for shareholders in the company to sell their shares at a higher price. Under terms of the deal, the company has a "go-shop" period which starts immediately and ends on February 8 in order to seek higher offers. In that case, the break-up fee to be paid by Duff & Phelps comes down to $6.65 million in case the company abandons the deal before March of 2013.
With shares trading 7 cents above the offer price, some investors are betting on a higher bid. Based on this small premium, a long position might be worth the gamble. Please note that I think the chances about a higher offer are fairly small, but the downside risks seem limited with the offer just 0.5% below the current share price.