DWF puts M&A on hold in face of financial challenges

Knowles: Very challenging economic environment

The last annual results of DWF as the only law firm listed on the main London Stock Exchange showed revenue, lock-up and debt all rising, and profit falling, meaning it is not looking for acquisitions at the moment.

Its results for the year to 30 April 2023 said the hope was that private equity company Inflexion would complete it £342m acquisition, taking it private, by the end of the year.

The shareholder court meetings and a general meeting are to be held on 12 September to consider the scheme of arrangement.

DWF chief executive Sir Nigel Knowles said the firm had grown profitably over the year “in what continues to be a very challenging economic environment”.

The rising debt was a striking feature of DWF’s results, going from £35m in 2019/20, to £60m, £72m and then – in the last year – £102m.

This was in part due to the initial consideration payments of £10m for the two acquisitions made during the year – costs firm Acumension and Canadian practice Whitelaw Twining – as well as lengthening lock-up, which went from 179 days to 196.

“The first three months of trading for FY24 have been in line with management expectations from a revenue and income perspective, however lock-up stretch has had a balance sheet and cash impact,” investors were told.

“Management are considering the achievability of the lock-up target of 170 days given economic headwinds which are driving longer billing and payment cycles.

“With the current trends not expected to abate, the board is not expecting to undertake any material M&A in the short term on a stand-alone basis as it seeks to address the ongoing challenges presented by lock-up stretch, increasing interest costs and the balance sheet leverage.”

Group chief financial officer Chris Stefani added: “Working capital efficiency remains a key focus of the group in order to maximise cash generation to manage borrowing costs.

“Inevitably, there are conflicting pressures between lock-up management, borrowing costs, leverage, investments in M&A and dividend requirements which are being carefully managed and considered by management and the board.

“The group continues to see growth and profit opportunities but the various performance levers will require cautious management in what continues to be a challenging environment.”

Group net revenue – the firm’s preferred measure – grew 8.5% (5% like-for-like) to £380m, with reported revenue up 8.6% to £452m.

Gross profit margin reduced by 1.3 percentage points to 50.4%. Profit before tax dropped 23% to £17m, but when adjusted items were included, was up 4.7% at £43m, which Mr Stefani said was “at the lower end of expectations”.

He explained: “Whilst profits increased year-on-year, gross and net margins were diluted primarily as a result of direct cost pressures from increased salaries demanded across the sector.

“The group has taken actions to mitigate these cost challenges via the cost programme which has made good progress and is expected to help to mitigate the ongoing upward cost pressures.”

Sir Nigel said: “We have once again grown the business profitably in what continues to be a very challenging economic environment. Like other legal businesses, we have seen salary and inflationary pressures, the impact of interest rate increases and variable demand particularly in transactional areas.

“Despite these challenges, we have seen our organic growth strategy and integrated propositions continue to resonate with clients, and have also added quality businesses to the group.”

Speaking about the upcoming acquisition, Paul Rimmer, chief executive of DWF’s legal advisory division – which delivered 83% of the group’s revenue – said: “The quantum of irrevocable undertakings obtained from the senior partners and leaders demonstrates our collective strong belief in the rationale for the proposed acquisition, especially access to additional capital, more flexibility on investment spend and the ability to maintain additional leverage capacity in the business as we invest to counter macro headwinds.

“This is an essential opportunity to ensure DWF has a firm footing for growth over the medium term and we all look forward to supporting our clients under Inflexion’s ownership.”

DWF listed in March 2019 at 122p and hit a high of 142p shortly before Covid hit and a low of 52p in June this year. As a result of the Inflexion offer of 100p, the price has since shot up, reaching 97p on Friday.

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