A Closer Look at a Financial Advisory's Buyout

Duff & Phelps (NYSE: DUF) rose as much as 20% in only one trading day, from $13.05 to $15.62 per share, due to its acquisition by a Consortium of private companies including The Carlyle Group, Stone Point Capital, Pictet & Cie, and Edmond de Rothschild Group. The Consortium agreed to pay $15.55 per share, which valued the whole company at around $665.5 million. Duff & Phelps could still seek competing offers by Feb. 8, 2013. Does this price represent a fair value for the company? Could the company receive a superior offer from third parties?

Business with the Increasing EPS

Duff & Phelps, founded in 1932, is an independent financial advisory and investment banking services provider, with more than 1,000 employees in around 25 offices globally.  The majority of the company’s revenue was generated from the Financial Advisory business segment, including Valuation Advisory, Tax Services, and Dispute & Legal Management Consulting business units. This represented around 66% of the company's total revenue in 2011. The other two business segments, Alternative Asset Advisory and Investment Banking, accounted for 14% and 20% of the total revenue, respectively. The top ten customers took between 11.8% and 15.9% of the total company’s sales in the last 3 years, and no single client represented more than 4.4% of total revenue in 2011. Since 2008, the company’s bottom line has kept rising gradually. The net income rose from $5 million to $19 million in 2011, and the EPS followed the same trend, increasing from $0.39 per share in 2008 to $0.63 per share in 2011. The firm began to pay dividends in 2009, from $0.10 per share to $0.32 per share in 2011.

Fair Value and Competing Bids?

With a total value of $665.5 million, the EV/EBITDA valuation for the company would be around 7.45x. The law firm Levi & Korsinsky, LLP announced that it would investigate if the offer price was fair, as at least one analyst had a target price of $24 per share, much higher than the offering price. Several people thought that it could receive the possible competing bids from other peers, such as FTI Consulting (NYSE: FCN) and Navigant Consulting(NYSE: NCI). FTI is operating in four main regions, including 43 offices in the US, 2 offices in Canada, 5 offices in Latin America, 14 offices in Asia-Pacific, and 24 offices in Europe, Middle East and Africa, as of the 2011 fiscal year. FTI is more diverse in terms of revenue sources. The biggest revenue source was from Corporate Finance/Restructuring, with $427.8 million, whereas the second biggest segment was Forensic and Litigation Consulting, with $365.3 million in revenue. In the last quarter 2012, FTI acquired Australian-based KordaMentha (Qld), which was a better fit in terms of turnaround, restructuring and corporate advisory services. Navigant also announced it would acquire Easton Associates to add to the strategy development, due diligence, and product planning business with the long-term relationship with large pharmaceutical companies.

As Duff & Phelps’ business was mainly comparable and competing with big audit firms, including Deloitte, KPMG, E&Y, and PwC, which are private and much larger businesses. Thus, it seems that the strategy is to acquire the company, and later bring it back to the market in a more competitive position with those audit firms. Because of a bit different business segment focus, I personally don’t think the competing bids would be from FTI and Navigant.

Foolish Bottom Line

The valuation seems to be relatively reasonable, as FTI and Navigant are valued at the comparative valuations of around 7.57x and 7x EV/EBITDA, respectively. Duff & Phelps’ investors could tender their shares in the market now, at an even higher price than the offering, with reasonable valuation and unlikely competing bids.