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DLC deal

More on DLC’s Stock Play

Dominion Lending Centres (DLC) founders Gary Mauris and Chris Kayat have announced a letter of intent to retake control of their company, of which they sold a majority stake in 2016.

If the deal goes through as expected, the two co-founders, along with other DLC principals, would have a 56% stake in the holding company, Founders Advantage Capital Corp (FA), which would own 100% of DLC and 3 other companies. They controlled 40% of DLC and 15% of FA previously.

Mauris will be FA’s CEO simultaneously with his role as CEO of the Dominion Lending Centres Group of Companies. He told us that FA agreed to this deal because it will add “substantial EBITDA” and because DLC is the company’s “highest performing business.” The stock price was also significantly under book value (an opportune time for Mauris and Kayat to become more invested) with FA’s leadership unable to turn the tide.

What it means to brokers and lenders is that “we’re back in the industry in a commanding way with a significant investment that takes a controlling interest in the company,” Mauris told CMT yesterday. “It means we (Gary and Chris) are not going anywhere.”

Quick notables:

  • FA stock was halted Wednesday Sept. 19. It’s trading again today, down 5% at the time this went to press
  • The principals will receive $4 million in cash via a promissory note plus stock options if the deal closes
  • At the current dividend rate and proposed shareholdings, the founders will each make $1.1 million a year in dividends
  • DLC Group has about 5,500 brokers, second only to M3 Group with 6,132

Speaking of FA’s stock, it’s not been a good news story. The share price (symbol: FCF) has been downtrending for over two years, ever since it bought DLC. And its CFO is leaving Sept. 30.

That downtrend is despite DLC growing its annual consolidated EBITDA from $14.6 million at the time of the FA transaction to more than $20.0 million for the trailing 12-month period ended June 30, 2018.

It’s not coincidental that this deal was done with FA’s shares languishing at $1.65. Knowing Mauris as I do, he is a winner who builds—not destroys—companies. Unfortunately, the company has faced headwinds (regulatory tightening, online competition, margin pressure, bigger bank sales forces, etc.) since being bought—headwinds that even the most skilled leader would find challenging.

But there is an upside. The deal helps FA do three important things:

1 – Consolidate Control

DLC is back in the driver’s seat. Mauris and Kayat, clearly upset by the stock performance, want to make their 44+ million shares worth something. They got a nice payday for selling in 2016, but now it’s time to protect their legacy and net worth. And the best part for them is, they have an opportunity to reinvest at today’s low share price and eventually sell all over again.

When asked when conditions will improve, Mauris noted various technology and cross-sell initiatives that DLC will be rolling out, some of which cannot be put in print yet. He added, “Once we get stability [in the housing market] conditions will improve. A steady market is better than a hot or cold market.”

He also mentioned that since B-20, DLC is seeing materially more leads because Canadians “need more advice.”

2 – Invest in Tech

There’s a race to arm brokers with cutting-edge digital mortgage technology—before direct-to-consumer lenders and online aggregators beat them to the punch. We saw that yesterday with rival M3 Group’s announcement that it’s launching a new division (M3 Tech) to create consumer-facing mortgage tech-like application/fulfillment automation and artificial intelligence.

As for DLC, Mauris says, “This structure gives us a good vehicle to access capital for new technology,” adding that it means investing in things like:

  • Newton (DLC’s deal management system, which is picking up revenue steam)
  • A free credit score and credit optimization offering for borrowers
  • Online lead generation (a priority as cost-per-click mortgage advertising grows increasingly expensive)
    • Mauris adds that brokers will still be involved in closing such deals
  • “Instant borrower decisioning” and instant pre-qualifications

Like its peer, M3 Group, DLC has just hired a Chief Technology Officer.

DLC, like M3, is investing heavily in workflow and document automation, Artificial Intelligence and lead generation. And good tech is not cheap.

This deal helps DLC reinforce its technology offerings in two ways:

First, it now has a more committed financier in Sagard, a Power Financial company aligned with the FA. Sagard is being incentivized with $1.8 million more stock warrants and a significantly lower strike price.

Second, FA is a public company that can now more easily raise money in the capital markets, in part because more earnings now flow to public shareholders. (M3 Group is not public but has ongoing access to considerable institutional capital, Luc Bernard, Chairman & CEO at M3 Mortgage Group, told us today.)

3 – Buy Competitors & Others

Canada’s mortgage broker industry is in the consolidation phase. That’s key because “they (FA) want us to make acquisitions in the Canadian mortgage space,” says Mauris.

And it’s not alone in that quest. “We’re looking to buy more broker businesses and are ready to generate more organic growth,” Bernard said of M3. M3 has been growing at 8% annually, he says, and “our next target is $80 billion [of closed mortgages annually, within 24-36 months].”

To compete with that, DLC will bolster its own broker ranks, something it’s been extremely good at. Being a public company and having Sagard’s credit facility gives it ample capital to execute, Mauris says.

“We’ll continue to make acquisitions that are accretive and that positively improve our network…and in anything that we can cross-sell around.”

Could that mean FA might buy Mauris’s and Kayat’s Insureline business?