Royal Capital Issues Letter to DFC Global Corp. Board of Directors

Announce Intention to Vote "AGAINST" All Proposals at Upcoming Special Meeting

Apr 23, 2014, 09:00 ET from Royal Capital Management, LLC

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