NEW YORK, June 15, 2015 /PRNewswire/ -- Barington
Capital Group, L.P. and Ancora Advisors, LLC announced today that
they have sent a letter to Mr. Peter
Ezersky, Chairman of DHI Group, Inc. (NYSE: DHX). In
the letter, Barington and Ancora state that they strongly believe
that a sale of the Company is the best way to maximize value for
shareholders, given the considerable gap between the Company's
current market price and its private market valuation as well as
the operational challenges the Company has had under its current
management team. They note that they have had discussions with
several potential private equity and strategic buyers of DHI who
have expressed interest in acquiring the Company at a premium to
its current market price. Barington and Ancora therefore urge
the Board in the letter to engage an investment banking firm to run
a sale process for the Company in order to unlock the intrinsic
value of the Company.
The full text of the letter follows:
June 15, 2015
Mr. Peter Ezersky
Chairman
DHI Group, Inc.
1040 Avenue of the Americas, 8th Floor
New York, NY 10018
Dear Mr. Ezersky:
Barington Capital Group, L.P. and Ancora Advisors, LLC represent
a group of shareholders of DHI Group, Inc. ("DHI" or the
"Company"). Collectively, the group beneficially owns approximately
four percent of the outstanding common stock of the Company. We
appreciate your taking the time to meet with us on May 8, 2015 to discuss the Company and its
prospects We also appreciated the opportunity to meet with
the Company's Chief Executive Officer Michael Durney and Chief Financial Officer
John Roberts on May 18, 2015.
We are investors in DHI because we believe that the Company's
common stock is undervalued. We believe that the Company has a
number of extremely attractive attributes that are not reflected in
its stock price, including 32% EBITDA margins, significant free
cash flow generation and a strong market position in its core
technology and engineering recruiting business Dice.com, which we
think has substantial opportunities for growth. Furthermore, the
Company's Tech and Clearance segment generates 44% EBITDA margins
and has a stable roster of approximately 7,800 recruitment package
customers, 2.4 million monthly unique visitors and more than 2.1
million searchable resumes.1
As you may know, the Company's stock price is currently trading
at a substantial discount to recent acquisition valuations of
online classified businesses. The Company has also materially
underperformed its peers and the market as a whole over the past
five-year period. We believe that the Company's disappointing
stock price performance is primarily a result of the fact that the
Company's management team has been unable to grow its customer base
in recent years despite its strong market position. It also appears
that DHI's management team has been struggling to efficiently
manage its recently acquired businesses, whose operating margins
lag that of the Company's core business.
We have had discussions with several potential private equity
and strategic buyers of DHI who have expressed interest in
acquiring DHI at a premium to its current stock price. Given the
considerable gap between the Company's current market price and its
private market valuation as well as the operational challenges the
Company has had under its current management team, we strongly
believe that a sale of the Company is the best way to maximize
value for shareholders. We therefore urge the Board to engage an
investment banking firm to run a sale process for the Company in
order to unlock the intrinsic value of the Company.
I. Situation Overview: The Company is
Undervalued
In light of the Company's stable revenue base, impressive EBITDA
margins and strong free cash flow generation, we believe that DHI
is undervalued. As shown in the table below, the Company currently
trades at 7.5x EV/2015E EBITDA and an 8.9% free cash flow (FCF)
yield,2 which is a material discount to its peers
despite the Company's significantly stronger EBITDA margins:
|
EV/Forward
EBITDA3
|
FCF
Yield
|
EBITDA
Margin
|
Peers Per Company
Proxy4
|
17.1x
|
2.0%
|
5.3%
|
Recruiting &
Staffing Companies5
|
8.9x
|
4.4%
|
9.8%
|
Media Cos. with
Online Classified Assets6
|
9.7x
|
4.8%
|
14.9%
|
DHI Group,
Inc.
|
7.5x
|
8.9%
|
32.1%
|
Source: S&P Capital IQ
Management Has Not Realized the Company's Growth
Opportunities
DHI's Tech and Clearance segment which includes Dice.com is the
largest business segment of the Company, generating approximately
50% of the Company's total revenue and more than 70% of total
EBITDA. Unfortunately, revenue growth at Dice.com has been tepid
since 2012. Revenue per customer has been increasing during this
period, but the number of customers purchasing recruitment packages
has declined in each of the past two years as shown in the table
below:
|
2012
|
2013
|
2014
|
Dice.com Recruitment
Package Customers
|
8,400
|
8,021
|
7,800
|
%
growth
|
1.2%
|
(4.5%)
|
(2.7%)
|
Average Revenue per
Customer
|
$986
|
$1,012
|
$1,070
|
%
growth
|
3.7%
|
2.6%
|
5.7%
|
Tech and Clearance
Revenue (in millions)
|
$129.2
|
$131.9
|
$136.6
|
%
growth
|
11.0%
|
2.1%
|
3.5%
|
Source: Company Filings
Despite being a specialized technology and engineering
recruiting site, Dice.com has long been under-represented in the
Silicon Valley market. During the Q2 2012 earnings call, the
Company's then-CEO Scot Melland
acknowledged:
"[T]he story in tech is much more of a market-by-market story
and I think we can do a much better job in focusing our marketing
and sales efforts on the markets where the business is and where
the business is growing than we have in the past."
Despite management's intentions to expand in faster growing
markets, the number of Silicon Valley-based job postings on
Dice.com has actually declined by more than 2% from January 2013 to January
2015 as shown in the table below:
Number of Job Postings by
Location
|
As
of:
|
Growth
Since
|
|
Jan 2,
2013
|
Jan 2,
2014
|
Jan 2,
2015
|
Jan 2,
2013
|
Silicon
Valley
|
5,176
|
4,603
|
5,054
|
-2.4%
|
Seattle
|
2,630
|
2,389
|
1,932
|
-26.5%
|
New York
|
7,696
|
8,047
|
8,068
|
4.8%
|
Washington,
DC
|
7,641
|
6,316
|
7,185
|
-6.0%
|
Source: DHI Group Website
We believe West Coast-based companies continue to be a
significant growth opportunity for the Company and that
management's recent sales and marketing efforts in the region are
long overdue and have been insufficient. Our analysis of the
job postings on Dice.com shows that Silicon Valley job postings
currently represent only approximately 6.5% of the total job
postings on Dice.com, well below the less technology-oriented
New York market which represents
approximately 11% of Dice.com's total job postings. Equally
disappointing is that Dice.com does not offer substantive job
postings from large and fast growing Silicon Valley companies such
as Google, Uber or Facebook.7 We believe that the
lack of revenue from such companies is an indication of a shortfall
in management's sales and marketing initiatives and its inability
to capitalize on growth
opportunities.
Management Does Not Appear to Have Efficiently Managed
Recently Acquired Businesses
We are also concerned that DHI's management team has not managed
its recently acquired businesses efficiently. From 2011 to 2014,
DHI has spent more than $125 million
on acquisitions.8 These acquisitions have added
scale in legacy verticals (IT Job Board, HEALTHeCAREERS and
OilCareers) and expanded the Company into new verticals (Hcareers).
The acquisitions of Slashdot Media and WorkDigital have also added
new products to the Company. Between 2011 and 2014, revenues
increased by $83.5 million or 46.6%,
largely driven by acquisitions, but overall adjusted EBITDA has
grown by only $6.8 million or
8.8%. Furthermore, the Company's EBITDA margin has fallen from
43% in 2011 to 32% in 2014, as shown in the table below. We believe
that this EBITDA margin erosion is largely due to dilution from the
lower profitability generated by these recently acquired
businesses.
|
2011
|
2014
|
$
Change
|
%
Change
|
Revenues
|
$179.1
|
$262.6
|
$83.5
|
46.6%
|
Adjusted
EBITDA
|
$77.6
|
$84.3
|
$6.8
|
8.8%
|
%
margin
|
43.3%
|
32.1%
|
|
|
Source: Company Filings
According to a July 2010 study by
McKinsey & Co., one of the most effective value-creating
acquisition strategies is to improve the performance of an acquired
company.9 DHI's EBITDA margin erosion indicates
that management has failed to materially improve the cost structure
and margins of its recently acquired businesses and therefore, in
our opinion, has not created meaningful value for shareholders
through these acquisitions.
Stock Buybacks Totaling $186
Million Have Not Created Value for Shareholders
The Company has been aggressively buying back stock since
August 2011 through five announced
stock repurchase programs. As of March
2015, the Company has repurchased $186 million of stock at an average cost of
$8.46 per share, close to the
Company's current market price. This sum represents nearly 40% of
the Company's current market capitalization. While we are
supportive of DHI's substantial stock buyback programs, the
Company's stock price has nonetheless remained stagnant during this
period. We believe the ineffectiveness of stock buybacks to create
value for shareholders is primarily due to management's inability
to capitalize on opportunities for organic growth as we have
highlighted above.
II. The Board Should Explore a Sale of the Company
Despite the Company's anemic revenue growth in recent years
under its current management team, we believe that the value of
DHI's core Tech and Clearance segment remains intact. This business
segment has a stable roster of approximately 7,800 customers
including the Department of Defense, Hewlett-Packard and
Amazon.com, as well as a roster of recruiting firms across the
United States. Approximately 92% of Dice.com's customers are
under annual contract generating average revenue per customer of
$1,076 per month with a 70% renewal
rate.10 Dice.com currently features more than 85,000 job
postings.
Due to the recurring nature of job postings from DHI's core
customer base, the Company's Tech and Clearance segment generates
impressive 44% EBITDA margins. As a result, this segment
generates high returns on capital and free cash
flow. Furthermore, in light of the large and growing number of
employers seeking high quality talent in the technology industry,
we believe that the Company's core Tech and Clearance segment can
significantly increase in size.
Our discussions with private equity and strategic buyers confirm
that the Company's recruiting platform, attractive margins and high
free cash flow generation should justify a value that is at a
premium to the Company's current stock price. We further believe
that a number of these potential buyers have the potential to
reinvigorate the Company's growth and operating performance. We
therefore believe that a sale of the Company to a strategic or a
private equity buyer is the best way to maximize value for all
shareholders.
Robust M&A Multiples for Online Classified
Businesses
We believe there is considerable interest among strategic
players in the media and publishing space looking to expand into
online classified businesses. Recent acquisitions in this space
have attracted low-teens EBITDA valuation multiples, as highlighted
by the following representative transactions:
Date
|
Target
|
Acquirer
|
Implied
Enterprise
Value
(mm)
|
EBITDA
Multiple
|
8/5/2014
|
Classified Ventures
LLC (73.1% stake)
|
Gannett Co.
Inc
|
$2,474
|
11.7x11
|
12/14/14
|
Digital Classified
(15% stake)
|
Axel
Springer
|
€2,973
|
13.9x12
|
Source: Public Filings
We are particularly encouraged by one transaction – Axel Springer's acquisition of a 15% stake of
its Digital Classified business from its private equity partner at
a 13.9x EBITDA multiple. Axel Springer Digital Classified includes
a European online recruiting business which is similar to DHI's
business model. We believe that DHI can also attract a valuation
that is significantly higher than its current trading value given
the niche it has developed in the specialized technology and
engineering recruiting industry.
III. Conclusion
Given the significant valuation multiple differential between
the Company's current market price and private market valuations in
the online classified industry, we believe that a sale of the
Company is the best way to maximize value for shareholders. Our
discussions with potential strategic and private equity buyers
indicate that there are likely to be numerous parties interested in
acquiring DHI at a premium to the Company's current stock price. We
therefore urge the Board to engage an investment banking firm to
run a sale process for the Company.
Barington and Ancora have previously worked with many publicly
traded companies to help improve shareholder value. As significant
shareholders of the Company, we hope we can do the same to help
maximize the value of DHI.
Sincerely,
/s/ James A.
Mitarotonda
|
/s/ Fred
DiSanto
|
James A.
Mitarotonda
|
Fred
DiSanto
|
Barington Capital
Group, L.P.
|
Ancora Advisors,
LLC
|
* * * * *
About Barington Capital Group, L.P.
Barington Capital Group, L.P. is an investment firm that,
through its affiliates, manages a value-oriented, activist
investment fund that was established by James A. Mitarotonda in January 2000. The Fund invests in undervalued
publicly traded companies that Barington believes could appreciate
significantly in value as a result of a change in corporate
strategy or from various operational, financial or corporate
governance improvements. Barington's investment team, senior
advisors and industry contacts are seasoned operating specialists,
experienced in working with companies to design and implement
initiatives to improve their financial and share price
performance.
About Ancora Advisors, LLC
Ancora Advisors, LLC is an investment advisor with approximately
$2.2 billion of assets under
discretionary management and an additional $1.3 billion of advisory assets. A
Registered Investment Advisor with over 30 professionals, Ancora
offers comprehensive investment solutions for institutions and
individuals in the areas of fixed income, equities, global asset
allocation, alternative investments and retirement plans.
Important Disclosures
Any views expressed in the above letter represent the opinion of
Barington and Ancora, whose analysis is based solely on publicly
available information. No representation or warranty, express
or implied, is made as to the accuracy or completeness of any
information contained therein. Barington and Ancora expressly
disclaim any and all liability based, in whole or in part, on such
information, any errors therein or omissions
therefrom. Barington and Ancora also reserve the right to
modify or change its views or conclusions at any time in the future
without notice.
The information contained in the letter does not recommend the
purchase or sale of any security nor is it an offer to sell or a
solicitation of an offer to buy any security. Furthermore, the
information contained in the letter is not intended to be, nor
should it be construed or used as, investment, tax or legal
advice. No representation or warranty is made that Barington
and Ancora's investment processes or investment
objectives will or are likely to be achieved or successful or
that Barington and Ancora's investments will make any profit or
will not sustain losses. Past performance is not indicative of
future results.
Nothing contained in the letter should be taken as any form of
commitment on the part of Barington and Ancora to take any action
in connection with any particular security. Barington, Ancora
and their affiliates are in the business of buying and selling
securities. They have, and may in the future, buy, sell or
change the form of their position in any security for any or
no reason whatsoever.
Barington and Ancora have neither sought nor obtained the
consent from any third party to use any statements or information
contained in the letter that have been obtained or derived from
statements made or published by such third parties. Any such
statements or information should not be viewed as indicating the
support of such third parties for the views expressed
herein.
Please see http://www.barington.com/press-releases.html for
additional disclosures concerning the letter.
1 Source: Company Form 10-K dated December 31, 2014.
2 Free cash flow (FCF) for DHI is calculated for the
last twelve months ending March 31,
2015 as follows: (a) Net cash flows from operating
activities, minus (b) Stock based compensation, minus (c) Purchases
of fixed assets.
3 As of June 11,
2015.
4 Source: S&P Capital IQ. Represents median
multiple of peers identified in the Company 2014 Proxy: Angie's
List, comScore, Constant Contact, Demand Media, Envestment, Global
Eagle Entertainment, GTT Communications, IntraLinks Holdings,
Limelight Networks, Liquidity Services, LivePerson, Monster
Worldwide, Move, QuinStreet, Stamps.com, Travelzoo, Truecar, XO
Group and Xoom.
5 Source: S&P Capital IQ. Represents
median multiples of Heidrick & Struggles International Inc.,
Korn/Ferry International, Kforce Inc., On Assignment Inc., Monster
Worldwide, Inc., Robert Half International Inc., TrueBlue, Inc. and
ManpowerGroup, Inc.
6 Source: S&P Capital IQ. Represents median
multiples of InterActive Corp., Gannett Co., Inc., The New York
Times Company, Axel Springer SE and SEEK Limited.
7 While the Company includes Facebook in its list of
customers in the Company's 10-K dated December 31, 2014, our review of current job
postings on Dice.com has not shown any posting from Facebook.
8 Source: Company Form 10-K dated December 31, 2014. Includes earn-out
payments.
9 Goedhart, Marc, Tom
Koller and David Wessels,
"The five types of successful acquisitions," (July 2010).
Source:
http://www.mckinsey.com/insights/corporate_finance/the_five_types_of_successful_acquisitions.
10 Source: Company Form 8-K Filing dated May 1, 2015.
11 Source: S&P CapitalIQ. Gannett Co., Inc.
paid $1.75 billion for 73.1% stake of
Classified Ventures, LLC. The transaction price implied a
multiple of 11.7x pro forma 2014 estimated EBITDA.
12 Source: Axel Springer Press Release. Axel Springer acquired 15% stake in Axel
Springer Digital Classified GmbH from General Atlantic Partners for
€446 million which implied a total value of €2,973 million for 100%
of the company. Axel Springer Digital Classified GmbH generated
€160.2 million in EBITDA for the first 9 months of calendar 2014
and therefore an annualized €213.6 million EBITDA implying an EV/
annualized EBITDA multiple of 13.9x.
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SOURCE Barington Capital Group, L.P.