On August 1, Bill Simpson wrote an analysis of Dolan Media (DM). In its debut Thursday, shares opened at $16.40 after pricing at $14.50. The company had expected the offering to price between $13.50 and $15.50 per share. The IPO totaled 13.5 million shares, 3 million more than previously expected. Monday the stock closed at $17.50.
The text of Mr. Simpson's original writeup follows:
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Dolan Media plans on offering 12 million shares (assuming over-allotments) at a range of $13.50 - $15.50. Insiders will be selling 1.5 million shares in the deal. Post-ipo DM will have 25.1 million shares outstanding for a market cap of $364 million on a $14.50 pricing. Goldman Sachs and Merrill Lynch are lead managing the deal, Piper Jaffray and Craig-Hallum Capital Group will co-manage. 3/4's of the ipo proceeds will be used to redeem preferred shares, 1/4 to repay debt.
Executives and Directors will own 20% of DM post-ipo.
From the prospectus:
We are a leading provider of necessary business information and professional services to the legal, financial and real estate sectors in the United States. We provide companies and professionals in the markets we serve with access to timely, relevant and dependable information and services that enable them to operate effectively in highly competitive and time sensitive business environments.
DM operates under two segments, Business Information and Professional Services.
Business Information - Business journal publishing, court and commercial newspapers and other publications as well as operating websites in 20 U.S. markets. Third largest business journal publisher and second largest court and commercial publisher in the U.S. DM also believes it's one of the largest carriers of public notices in the United States. DM publishes 60 print publications consisting of 14 paid daily publications, 29 paid non-daily publications and 17 non-paid non-daily publications. Paid publications and non-paid and controlled publications had approximately 75,500 and 167,400 subscribers, respectively, as of March 31, 2007. DM's 42 on-line publication/non publication websites also had approximately 315,000 unique users in March 2007.
Professional Services - This is the segment that is the most interesting. DM, via the ABC and Counsel Press brands names, provides services that enable law firms and attorneys to process residential mortgage defaults and court appeals. DM is the dominant provider of mortgage default services in Michigan and Indiana, which had the second and third highest residential mortgage foreclosure rates in the first quarter of 2007. DM serviced approximately 30,100 mortgage default case files relating to approximately 270 mortgage loan lenders and servicers that are clients of DM law firm customers in Michigan and Indiana during the first quarter of 2007. DM, via their Counsel Press brand, is the largest appellate service provider nationwide, providing appellate services to attorneys in connection with approximately 8,300 and 2,200 appellate filings in federal and state courts in 2006 and the first quarter of 2007. Customers of Counsel Press include 80 of the top 100 law firms in the U.S.
DM's Business Information segment collects revenues primarily via classified advertising, Professional Services via fee arrangements. Both segments have grown through acquisition, with the Business Information segment completing 38 acquisitions since 1992 and Professional services 5 since 2005.
In 2006, the Business Information segment accounted for 55% of revenues, Professional Services 45%. Display and classified advertising accounted for 21% of total revenues, public notices also 21% of revenues. While DM has its hands in a few different pots, it's more a classic classified advertising reliant publication company than anything else, with 42% of total revenues derived from advertising and public notices. A risk here going forward is that a number of states are considering switching from required public notice postings in print publications to posting their own public notices online. If that is a trend that develops, DM could lose a substantial portion of its public notice business.
Mortgage foreclosure services accounted for 35% of revenues in the first quarter of 2007.
DM will have a bit of debt on the books post-ipo, $55 million. Fully expect DM to continue to acquire smaller publications and professional services businesses, so debt here should rise going forward.
Revenues in 2006 were $128 million. 2006 was the first full year DM derived revenues from their professional services segment, so comparables to previous years is not valid here. Operating margins were 17%. Interest expense 'ate' up 29% of operating profits. Net margins were 6%, earnings per share $0.31. On a $14.50 pricing, DM would trade 47 X's 2006 earnings.
2007 - DM had a solid first quarter. Full year revenues should be in the $150 million ballpark, a 17% increase over 2006. Revenue growth is being driven by the Professional Services segment. Operating margins look to be improving a bit past few quarter, full year could see 20%-21%. Interest expense should eat up 20% of operating profits. Net margins should be in the 9% ballpark. Earnings per share should be $0.50 - $0.55. On a $14 1/2 pricing, DM would trade 28 X's 2007 earnings.
Conclusion - I like the mortgage default processing segment quite a bit here, but I'm not enamored with the publications side of the business. Problem is, DM conducts its mortgage default processing services in just two states, while it owns publications in 20 markets and derives 55% of annual revenues from that segment. 28 X's 2007 earnings with a 17% organic revenue growth rate is an awful lot to pay for that segment. Mortgage defaults in Michigan and Indiana have been a growth business the past year and should continue to be a strong revenue driver for DM.
On that basis, this is a slight recommend in range. Frankly I'd be much more interested here if DM was ipo'ing just its higher margin, higher growth Professional Services segment here without the print publication business attached. I wouldn't pay up for this deal, but in range it is worth a shot due only to the Professional Services segment.