NEW YORK, April 23, 2014 /PRNewswire/ --
-- Outline Perceived Deficient Sale Process
-- Engage Akin Gump Strauss Hauer & Feld LLP as Legal
Counsel
-- Encourage Like-Minded DFC Shareholders to Contact Royal Capital
Royal Capital Management, LLC and its affiliates (collectively,
"RCM" or "Royal") are shareholders of DFC Global Corp. ("DFC" or
the "Company"), collectively holding approximately 2.9% of the
Company's outstanding common stock (the "Common Stock").
Yesterday, Royal sent a letter (see below) to the Board of
Directors of DFC Global Corp. outlining its intention to vote
"AGAINST" all proposals at the upcoming Special Meeting of
Shareholders. The letter highlights RCM's perception of
deficiencies in the sale process undertaken by the Company and the
resulting below fair value proposed sale price.
Royal has engaged Akin Gump Strauss Hauer & Feld LLP
("AGSHF") to advise it with respect to all legal options available
to shareholders of DFC.
RCM encourages like-minded shareholders to contact us to discuss
their views.
The text of the letter to DFC's Board of Directors follows:
Royal Capital Management, LLC
623
Fifth Avenue, 24th Floor
New
York, NY 10022
VIA EMAIL AND FEDEX
April 22, 2014
Mr. Jeffrey Weiss, Chairman and Chief Executive Officer
Mr. Edward A. Evans, Director
Mr. John Gavin, Director
Mr. David Jessick, Director
Mr. Clive Kahn, Director
Mr. Michael Kooper, Director
Mr. Ronald McLaughlin, Director
DFC Global Corp.
1436 Lancaster Avenue, Suite 300
Berwyn, Pennsylvania 19312
Attention: Jeffrey Weiss, Chairman and CEO
Gentlemen:
Investment funds managed by Royal Capital Management, LLC and
its affiliates (collectively, "RCM" or "Royal") are shareholders of
DFC Global Corp. ("DFC" or the "Company"), collectively holding
approximately 2.9% of the Company's outstanding common stock (the
"Common Stock").
Our respective managed funds has purchased DFC shares at prices
ranging from $6.37 to $15.56 per
share. We purchased all of these holdings before the Company
announced its agreement to be acquired by Lone Star Funds ("LSF")
in an all-cash transaction (the "Management Led Buyout").
We are writing to express our disappointment not only at the
terms of the Management Led Buyout that you approved, but also at
the wholly-insufficient process which you undertook in reaching
these terms. It is our intention to vote "AGAINST"
Proposal #1, the Management Led Buyout as it stands today. We
also intend to vote "AGAINST" Proposals #2 (the advisory
vote regarding change in control payments for members of DFC
management) and #3 (the proposal to permit adjournment of the
special meeting to solicit proxies if insufficient votes are
received to approve the Management Led Buyout at the special
meeting). We believe that as the Company's shareholders learn
about the Management Led Buyout, more of its shareholders are
likely to i) reach the same conclusions that we have and ii)
potentially speak out about their views – as we are doing.
As you are aware, LSF is an incredibly sophisticated buyer of
distressed assets with over $45
billion of aggregate capital commitments.[1] LSF has
closed more than 370 investments (in over 1,100 transactions) at an
aggregate purchase price of more than $95
billion.[2]
We believe that the proposed acquisition by LSF for
approximately $1.3 billion in
aggregate consideration ($9.50 per
share) substantially undervalues the Company and represents a
woefully inadequate price. We are acutely disappointed that
the Board of Directors is willing to force the public shareholders
to forego the significant upside inherent in the Company's
assets.
As long term oriented investors, we have been, and remain,
highly confident in our investment in anticipation of market share
gains driven by the newly-regulated, consolidating U.K. consumer
lending market. We are also enthusiastic about the Company's
scalable Internet lending platform and growing store base in
emerging European markets, where the underbanked population is more
than double the size of that of the U.K. Furthermore, we
believe the price offered by LSF could be justified by DFC Global's
developed U.S. and Canadian markets alone, leaving the long awaited
fruition of shareholders' time and capital investment in
international markets to the purchasers "for free". In short,
in our view, the timing could not be more unjust. Independent
analysts seem to agree with our view:
"Valuation of DFC's Canadian business alone could be nearly
equivalent to the total Company's
valuation."
Robert Napoli,
William Blair Analyst
April 3,
2014
The Proposed Management Led Buyout Represents a Significant
Discount to the Long-Term Value of DFC
We believe LSF's proposal to acquire DFC Global for $9.50 per share represents a massive injustice to
shareholders who, in our view, would be forfeiting their equity
stake at a significant discount to the Company's long-term
intrinsic value.
We believe the following table illustrates the range of
long-term intrinsic value for the Company's shares:
Illustrative DFC
Valuation Range
|
Normalized EBITDA
=
|
$300
million
|
Multiple
|
Implied Share
Price
|
6.0x
|
$25
|
7.0x
|
$32
|
8.0x
|
$40
|
*Net Debt of $848
million, 38.6 million shares
|
Recent Run Rate Results / Management Commentary
Based
upon the proposed aggregate consideration of $1.3 billion, the Management Led Buyout values
our Company at just 4.3x a $300
million EBITDA run rate, which, as recently as March 21, 2014, Jeffrey Weiss had claimed the
Company would achieve during FY2015 (ending June 30, 2015).[3] Notably, these comments
were made only one and a half weeks before the proposed transaction
was announced and presumably reflected any comments DFC had
received from the FCA in its letter to DFC from almost a month
earlier.
The Company's infrastructure is clearly able to support the
earnings levels referenced by Mr. Weiss based upon FY2012 and
FY2013 EBITDA of $304 million and
$274 million, respectively (implying
multiples of just 4.3x FY2012 and 4.7x FY2013 EBITDA).
Justification for Proposed Acquisition Price
We are
somewhat befuddled by the conclusions reached by Houlihan Lokey in rendering their fairness
opinion. We have undertaken a similar analysis, and have come
to a very different conclusion.
Secondary market valuations assigned to industry peers average
6.7x to 9.6x EBITDA[4] – versus 4.5x to 6.0x applied by
Houlihan Lokey. Of note, the high
end of the range is based on the peer group that the company used
when setting its own executive compensation. Further, we believe
that DFC's geographically diversified, capital-light business model
– which requires just $20 million in
annual maintenance capital expenditures (<2% of sales) –
deserves a premium EBITDA multiple. We fail to see the logic
in the Board's acceptance of a valuation of just 4.3x normalized
EBITDA in the context of today's market valuations.
DFC's Industry
Peer Group Used in Houlihan Lokey's Fairness
Opinion Analysis
|
TEV/Adjusted
EBITDA
|
Company
|
Ticker
|
LTM
|
CY
2014
|
CY
2015
|
First Cash
Financial
|
FCFS
|
11.5x
|
10.1x
|
9.2x
|
Cash America
International
|
CSH
|
5.9x
|
5.6x
|
5.0x
|
World
Acceptance
|
WRLD
|
6.7x
|
6.6x
|
6.4x
|
EzCorp
Inc.
|
EZPW
|
4.6x
|
5.1x
|
4.5x
|
DFC's Peer
Group avg.
|
|
7.2x
|
6.8x
|
6.3x
|
DFC's Industry
Peer Group Used to Set Executive's
Compensation
Levels in
DFC 2013 Proxy
|
TEV/EBITDA*
|
Company
|
Ticker
|
LTM
|
NTM
|
Cash
America
|
CSH
|
5.5x
|
5.8x
|
EzCorp
Inc.
|
EZPW
|
5.4x
|
5.4x
|
First Cash
Financial
|
FCFS
|
10.2x
|
11.3x
|
AARON'S
INC
|
AAN
|
7.5x
|
8.3x
|
GLOBAL
PAYMENTS
|
GPN
|
10.2x
|
11.0x
|
GREEN DOT
CORP-A
|
GDOT
|
2.2x
|
3.8x
|
H&R BLOCK
INC
|
HRB
|
19.0x
|
11.9x
|
HEARTLAND
PAYMEN
|
HPY
|
10.0x
|
9.7x
|
MONEYGRAM
INTERN
|
MGI
|
7.2x
|
7.8x
|
NETSPEND
HOLDING
|
NTSP
|
N/A
|
N/A
|
RENT-A-CENTER
|
RCII
|
6.9x
|
6.9x
|
VERIFONE
SYSTEMS
|
PAY
|
13.9x
|
25.9x
|
WESTERN
UNION
|
WU
|
8.2x
|
7.8x
|
DFC's Peer
Group avg.
|
8.8x
|
9.6x
|
|
|
*CapIQ
(4/02/14)
|
We are also somewhat surprised by the lack of reference to any
control premium / premiums paid analysis within Houlihan's
opinion.
Based on Management's own March
2014 Forecast, provided in the Company's recently filed
Preliminary Proxy Statement, we note that even at Houlihan Lokey's
discounted multiple of 6x EBITDA, the 2018 terminal value of DFC's
equity equates to $33 per share.
Illustrative DFC
Valuation Range Based on Management Forecast for FY
2018
|
Management
Forecast:
|
February
2014
|
March
2014
|
FY 2018 Adjusted
EBITDA=
|
$355
million
|
$350
million
|
Multiple
|
Implied Share
Price
|
6.0x
|
$33
|
$33
|
7.0x
|
$42
|
$42
|
8.0x
|
$52
|
$51
|
*Net Debt of $848
million, 38.6 million shares
|
Recent Share Repurchases
The Company repurchased
shares during each of last five quarters through December of 2013;
the average repurchase price in FY2012 was approximately
$16 per share and in FY2013 it was
approximately $15.50 per
share.
"At $9.50 per share, DLLR is
valued at just 4.1x our FY15 EBITDA estimate of
$283mm."
Mark Palmer, BTIG
Analyst
April 4,
2014
To add insult to injury, it appears that the Company did not run
anything resembling a robust sale process.
In reading the Company's recently filed Preliminary Proxy
Statement (filed after the market close on Friday, April 18, 2014), we have the following
observations:
- Outside of an abbreviated process during 2012 (in April and
October), the Company did not undertake any broad-based effort to
market itself.
- Despite lip service paid to the formation of a Special
Committee, at no time since the formation of the Special Committee
did the Company engage with any potential buyer other than
LSF.
- Despite the statement that on March 21,
2014, the Company's legal advisors informed the Special
Committee that LSF "indicated that it did not intend to have any
discussions with management as to post-closing ownership,
employment or compensation arrangements until after execution of
the merger agreement," we are skeptical. Notably, between
October 30, 2013 and February 20, 2014, there were at least 11
separate in-person meetings or conference calls between members of
DFC Management and representatives of LSF outside the presence of
any members of the to-be-formed Special Committee. We think
it would be important for shareholders to be informed of exactly
what conversations may have occurred during these points of
contact.
- Mr. Weiss' memo to "All DFC Employees" on April 2, 2014, in which he stated "With their
commitment, we believe we can accelerate our plans to grow our
business, resulting in enhanced opportunities for all of us…" seems
to belie the rather downtrodden narrative that the Company has put
forth with respect to its business prospects within the Preliminary
Proxy Statement.
- Compensation
- Each of Messrs. Weiss and Underwood are highly incentivized to
see the Management Led Buyout occur, as they are both beneficiaries
of certain "single trigger" change in control benefits.
- It would appear that each of the three members of the Special
Committee received an incremental $25,000 in Board fees for less than one month of
"part time" work. Given what seems like a less than robust
process, we ask that each of Messrs. Gavin, Jessick and Kahn return
these amounts to DFC.
- Specific reference is given to the Board's consideration of
potential covenant and capital structure risks that the Company
could face. We note that the Management Led Buyout includes
debt commitments (in conjunction with LSF's additional equity
commitments) to sufficiently refinance all of the Company's
upcoming maturities. Given the availability of financing to
the Company, we question why the Board did not take this
opportunity to refinance, rather than seeking to sell the Company
out from under its unaffiliated shareholders.
The Company appears to us to have sought to justify its approval
of the Management Led Buyout by simultaneously reducing earnings
guidance for 2014 (the "Simultaneous Guidance Reversal"). In
light of recent commentary by Management in public forums, we find
this less than compelling.
Some of these comments include:
- "With our current expansionary efforts in Spain, Poland, the Czech
Republic and Romania,
countries with a combined population of 117 million nearly double
that of the U.K., we believe continental Europe represents significant potential to
drive top and bottom line growth for the company while helping us
to further diversify our geographic concentration and product
portfolio."
Jeffrey Weiss
January 30,
2014
- "While the U.K. continues to affect our overall results, we
remain optimistic about the potential for this market in the long
term. To that end, we acquired 15 stores in the U.K. during the
quarter, predominantly in the Greater
London area, which mostly transact business in the form of
pawn broking, foreign exchange, check cashing, money transfer, and
gold buying. Many of these stores are well established in prime
locations and provide an excellent opportunity for us to bolt on
our unsecured short-term loan products as well as a number of other
products and services."
Jeffrey Weiss
January 30,
2014
- "... We fully expect our U.K. business will re-emerge at the
end of this transition period a much stronger business, operating
in a clarified marketplace that is even better positioned for
success and meeting the needs of our customers."
Jeffrey Weiss
October 30,
2013
- "... we believe we will be better positioned than many of our
competitors to navigate through this new operating environment
[U.K. under the FCA regime beginning April
1, 2014], which should provide a significant opportunity in
the long term to expand our market share in the U.K., as many
providers will likely struggle under the new regulatory framework
and will exit the marketplace."
Jeffrey Weiss
October 30,
2013
Given the interest of a "smart money", sophisticated and
highly-regarded distressed asset investor like LSF in backing the
Management Led Buyout notwithstanding the Simultaneous Guidance
Reversal, we are left to wonder why there appears to be dissonance
between DFC's downbeat forecasts versus the apparent optimism for
the future of the business implied by the apparent participation of
DFC management and LSF in the Management Led Buyout.
We have not viewed DFC as an investment predicated on the
Company's FY2014 / near-term earnings – FY2014 ends in less than
three months. Rather, we have viewed, and continue to view,
the opportunity as being in line with Jeffrey Weiss' recent comments to public market
investors at the BTIG conference less than two weeks before the
announcement of the Management Led Buyout, when he referenced the
run rate earnings power that the Company could achieve during
FY2015. Notably, the Company's revised forecasts
significantly reduced FY2014 EBITDA estimates, but made negligible
downward revisions to FY2015 (and beyond) EBITDA estimates.
In short, we cannot help concluding that the Board has failed to
maximize value for and to be candid with DFC's shareholders.
We believe that, ultimately, the value of the highly strategic
platform of the Company is far in excess of the proposed deal
price. We believe that shareholders should be seeking to be
paid appropriate value for the DFC shares OR should demand
that the Company continue in its current "public" state so that
shareholders – many of whom have endured significant volatility in
the value of their holdings through a period of regulatory
uncertainty – are able to benefit from the patience they have shown
as the Company seeks to "turn the corner" on this regulatory
uncertainty. We believe that if the Management simply
continued on the Company's current course, DFC shareholders would
be better off on a stand-alone basis than we would be if we were to
accept the terms of the Management Led Buyout. That said, we
remain open to a sale of the Company at a price which reflects its
true long-term value.
The [Lack of] Process Leading the Agreement for the
Management Led Buyout
A below fair value deal price is tough
to swallow in any context, but it is a particularly bitter pill
when it has resulted from a sale process that appears not only to
have not been exhaustive, but in actuality was limited to two
potential buyer groups. This seeming abdication of the
Board's duty to maximize value to DFC's shareholders through a
competitive sale process raises significant questions about the
motivations of the Board and Management. Specifically, given
Management's proposed ongoing role in the Company, we question
whether the process was designed for the benefit of DFC's
shareholders or for the benefit of DFC's Management. We urge
the Independent Directors / Special Committee to engage in some
deep soul-searching as it relates to this question, because,
depending on the answer, it raises real questions about the Board's
ability to exercise effective governance and the potential that
this committee and entire board has breached its fiduciary duty to
shareholders.
In our experience, providing a would-be acquirer an
almost-exclusive opportunity to bid on your company, failing to
conduct a meaningful market-check and ultimately signing a merger
agreement with meager provisions to maximize value for shareholders
(including the lack of any "Go Shop" provision) is a likely
indication that incentives of the Board are misaligned with those
of the shareholders. One need look no further for
misalignment than the historic interaction between Chairman and CEO
Jeffrey Weiss and the Compensation Committee of the Board. In
its review of the Company's Proxy Statement for the November 2013 Annual Shareholder Meeting, ISS
recommended that shareholders vote "AGAINST" the Company's
"Say-On-Pay" initiative as a result of compensation practices
related to Mr. Weiss.
Since July 1, 2011, a period
during which DFC stock has declined by 58.5%[5], wiping out
approximately $584 million of
shareholder value, Mr. Weiss has received compensation totaling
more than $16.6 million.[6]
Even more egregious, even though Mr. Weiss is slated to continue
to run the Company following the Management Led Buyout, he appears
to be "double dipping" with the transaction. In addition to
presumed ongoing compensation following the proposed transaction,
he, along with Mr. Underwood, will become eligible for a "single
trigger change of control" bonus upon consummation of the
Management Led Buyout. We wonder if the Board views this as
unseemly as we do, given the decidedly negative stock price
performance that DFC shareholders have recently endured.
It is not hard to imagine the incentives that pushed Mr. Weiss,
with the Board's apparently unwavering support, towards accepting
this transaction with a "smart money" buyer without bothering to
conduct a market check either before or after the execution of the
sale agreement. Shareholders, however, do not receive the
same special benefits, and we cannot help wondering whether Mr.
Weiss' (and the rest of Management's) interests were put ahead of
those of the Company's shareholders.
DFC Could Stay Public and Shareholders Would be Better
Off
We, and many other shareholders, have viewed DFC as an
underperforming company with substantial upside opportunity and
highly valuable assets. LSF appears, by implication, to us to
agree with at least part of this assessment. Given that DFC
is a public company with access (at some price) to the capital
markets, these opportunities do not require a financial partner
with LSF's presumably high-cost capital to execute. More
important than any outside partnership, we believe that DFC would
greatly benefit from increased independent voices in its Boardroom,
so that the Board could refocus on seeking to maximize shareholder
value for the long term.
Shareholders Should Demand that LSF (or an Alternative Buyer)
Pay a Fair Price or Should Vote "AGAINST" All Proposals and Allow a
Maximization of Long-Term Value of Our Shares
We believe the
Management Led Buyout woefully shortchanges DFC shareholders.
Although we believe that DFC has the potential to thrive as a
continuing public company, we would support a sale of the Company
at a fair price, but believe that any transaction with LSF (or any
other party) must provide adequate consideration for the holders of
DFC common stock. We note that there appears to have been a
significant turnover in the shareholder base since the announcement
of the Management Led Buyout, with over 58.1 million shares having
changed hands already (versus approximately 38.6 million shares
outstanding). We further note that the stock has, for the
most part, traded above or approximately at the proposed
transaction price. Fortunately, given the apparently wide
dispersal of the Company's common stock, the ultimate approval by
shareholders is by no means assured. We believe that there
are other potential acquirers who may come forth, and we encourage
any and all to do so.
We greatly regret that you, fiduciaries on our behalf, appear to
have entered into a transaction without doing the work required to
seek to maximize value for all DFC shareholders. As things
stand now, we cannot support the Management Led Buyout and intend
to vote "AGAINST".
Sincerely,
Royal Capital
Management, LLC
/s/
Yale M. Fergang,
Managing Member
/s/
Robert W. Medway,
Managing Member
|
ABOUT ROYAL CAPITAL MANAGEMENT, LLC
Royal Capital
Management, LLC ("Royal Capital"), formed in 1998, is an investment
adviser registered with the United States Securities and Exchange
Commission. Royal Capital provides investment advice to limited
partnerships and other pooled investment vehicles, pursuing an
equity long/short strategy with a deep value orientation. The
principal owners are Robert W.
Medway and Yale M. Fergang.
[1]
http://www.lonestarfunds.com/about-us/competitive-advantages/
[2]
http://www.lonestarfunds.com/about-us/competitive-advantages/
[3] Comments attributed to Jeffrey Weiss at a BTIG investor
conference.
[4] Based upon a range of sell side analyst estimates and the
Company's defined Peer Group in its 2013 Proxy Statement.
[5] Through April 1, 2014
[6] This does not reflect amounts earned since the period reflected
in the Company's last annual proxy statement.
SOURCE Royal Capital Management, LLC