DH Corp. goes two for two
Once you have the formula working, then keep at it.
That seems to be the philosophy at DH Corp., which for the second time in two years has announced a major U.S. acquisition and financed it in a similar manner. And for good measure it also used the same trio of bookrunners who collected the same 4% in agents’ fees.
In July 2013, when it purchased Harland Financial Solutions, the former Davis & Henderson financed the US$1.2 billion acquisition with a combination of subscription receipts and convertible debentures. Specifically, $690.2 million was raised — after the underwriters exercised the over-allotment option — split between receipts of $460.2 million and $230 million of 6% converts. In this way, the split between equity and debt was two-thirds - one third. D&H issued 21.505 million receipts at $21.40.
When it announced on Monday the US$1.25 billion acquisition of Fundtech, a slightly larger target, it also used the same package of subscription receipts and converts. But because its share price had risen substantially in the intervening period, DH was able to offer a small number of receipts (16.50 million) at $37.95 each to generate a larger amount of equity: $626.18 million. It raised the same amount of convertible debentures ($200 million) but because of lower interest rates was only required to pay 5%. Overall, the split between equity and debt changed to 75.8% and 24.2%, respectively.
So why offer that combination of securities? For starters, it spreads the burden — allowing DH to sell common equity at a higher price than otherwise. It’s also flexible as, to the extent the debentures are converted, it allows DH to sell equity at higher prices in the future.
There is one slight difference between the two financings, a difference flowing from the recognition that DH has become an investor favourite: over the past five years it has generated a total return of 203% — more than quadruple what the TSX gained over the same period. It pays a quarterly dividend of $0.32 per share.
On its current financing, DH was able to negotiate a higher conversion premium for the converts than on its previous deal. The marketing materials indicate the exercise price was $52.75, which is a fairly healthy 39% premium above the so-called reference rate — or the price the receipts were offered at. In its July 2013 financing, DH had to settle for a 35% premium, which derives from a $28.90 exercise price relative to a $21.40 issue price.
As a result, the 6% convertibles have become a very good investment. For most of March 2015 they traded around $140.
And there may be a potential difference between the financing of 2013 and 2015. Last time, DH didn’t raise all the equity that it needed to fund the acquisition. Instead, a few months after raising $460.2 million, it returned with a bite-sized $201.4 million offering of common shares.
On that financing, DH was able to sell the equity at a much higher price ($36.25) than it was a few months earlier. Clearly, the market liked the Harland acquisition and bid the stock up and DH was more than happy to accommodate that demand.
We will know in a few months if 2015 is an exact replica of 2013.