Legal Business

DWF’s private equity buyout: Selling the family silver or the opportunity of a lifetime?

In July, the board of DWF Group Plc confirmed market reports that it was planning to delist from the London Stock Exchange in a buyout by private equity firm Inflexion. Having floated in 2019, the fanfare of a record £95m IPO and a valuation of £366m to make DWF the UK’s largest listed law firm has arguably not lived up to the hype.

In the four years since, the firm’s fortunes have been chequered, with its highest valuation recorded just before the pandemic hit at 141.4 pence per share in February 2020, with a drop to 90 pence per share in March 2020 and an all-time low in June 2020 of 53 pence per share.

It’s fair to say that timing has not been on DWF’s side. Notwithstanding listing only a year before Covid struck, the public markets have since been battered by a catalogue of unfortunate events – Russia’s invasion of Ukraine and the ensuing energy crisis, supply chain problems, rampant inflation and high interest rates.

As stated in the recommended cash acquisition document released on the LSE last month, Inflexion intends to use its capital to ‘support DWF in continuing its strategy of acquiring bolt-on businesses,’ as well as work closely with DWF’s management team to ‘accelerate DWF’s organic and inorganic growth.’

Speaking to Legal Business, Sir Nigel Knowles, CEO of DWF, is sanguine about the firm’s position and the take-private: ‘DWF has a strategy that has proven to be a good one, which is delivering. A private owner will help us execute our strategy to give us the best opportunity to achieve this, including for our people and our clients. The same rationale for listing applies to this transaction, just with a private owner.’

Culture clash?

So, how will DWF’s prospects change under private ownership? ‘A lot of the discussion about professional services firms taking external investment is about the cultural impact,’ asserts partnerships specialist Jonathan Cheney at Addleshaw Goddard.

While the most significant cultural transformation would have occurred when DWF decided to list on the stock exchange, there remains the risk that private ownership will drive the company’s culture further away from its traditional law firm origins, due to the perceived reputation of private equity investment and its focus on fast returns.

Cheney explains: ‘If the focus is purely on short-term financial gain, the risk is that there will be lots of redundancies and many roles outsourced to lower-cost regions. That is never going to work for a people business like a law firm, as the people define the culture. Disenfranchising a large proportion of your work force, who are the main asset of the business, isn’t going to work for anyone.’

McCarthy Denning’s partnership and LLP partner, Tina Williams, voices a similar view: ‘The law is a people business, so lock-ins or incentivisation to make people stay will be incredibly important for the success of the transaction. If they haven’t got the people, they have nothing.’

On the potential risks for DWF posed by private equity ownership, Gowling WLG chief executive David Fennell, argues: ‘It will lead to more partner scrutiny and accountability. The partners, who are the key assets of the business, may not want to be in that sort of environment.’

Indeed, several market commentators flag the need to counter the impact of a culture clash and discussed the importance of locking in partners with incentives.

Gemma Phillips, an M&A partner at Addleshaw Goddard who has advised Inflexion on past acquisitions, is more optimistic about the deal: ‘There have been private equity investments into partnerships, particularly in the insurance space, where there have been some mixed results. Inflexion, however, has an incredible track record, and if anyone was going to make a success out of it, I’d expect Inflexion to.’

Meanwhile, another City pundit puts the transaction into context: ‘The law firm businesses that have been successful, like Setfords which is owned by Phoenix, are the types of firms that were already run like businesses to begin with, without a big partner base for example, or with a lot of employees that don’t have the same partnership focus.

‘DWF is different because it still feels more like the traditional type of law firm, which is where the challenge lies – ensuring that they are getting the balance right between keeping the aspects that work for a partnership and making the business work for a third-party investor.’

The war for talent in a PE buyout

‘Inevitably, it does become difficult to attract new talent when the promised land of partnership is no longer on offer,’ reflects Fox & Partners partnerships expert, Dean Fuller.

Indeed, Fuller’s observation arguably applied to the time DWF listed, albeit to a lesser extent, since partners were still able to be minority shareholders in the holding company of the firm.

Although partners will still be able to own private shares in DWF, Inflexion will expect to receive a return on its invested capital first, and the investment agreement will restrict the ability for shareholders to sell their shares more than a public company is subject to. These differences will likely make it harder than it already was under public ownership for the firm to attract high-quality solicitors and retain them in the long term as a private company.

The recommended cash agreement posted to the LSE outlines Inflexion’s intention to pay DWF’s existing shareholders 97p per share, with at least four shareholders set to receive a financial windfall of over a £1m. While this is excellent news for DWF’s current partners, what does the future look like for the next generations of DWF solicitors?

Fuller notes: ‘If you are a current partner, then who cares? But how will the firm retain its staff and motivate the best talent to join it when the proprietary route is gone? You could do it through salaries, allocating shares, and bonuses, but you can’t say: “One day son, this firm will be yours”. There is a war for talent so they will have to be competitive in their salaries.’

On the key considerations from an incentives perspective when taking a listed law firm private, Williams observes: ‘The structure of partner or employee remuneration need not necessarily change at all. The partners/employees may get a remuneration increase, but I should be surprised as this would be a long-term burden for Inflexion. A well-constructed bonus plan, however, provides one-off payments and can incentivise the right kind of performance year on year.’

Fuller adds: ‘Once the partners sell the family silver, what is in the long term for the future generations of solicitors who devote time to developing business for the firm, but never acquire a proprietary interest in it? This will affect the loyalty of partners to the firm.’

He warns: ‘Investors and staff will quickly see through a transaction that is motivated just by financial gain for a small number of people. If you miss out on the windfall, you might be tempted to move on to another firm.’

Does hope float for DWF under private equity?

Sceptics argue that the decision to delist may be a short-term solution for DWF’s existing shareholders to make back money lost during the firm’s floatation, possibly at the expense of its future. Is there a way DWF could flourish under new ownership?

Cheney says: ‘You can have external investment, successful growth of the value of the business and retain your culture, but you need the right investor and the right strategy to achieve that. If cash is reinvested in the business and shares are available for employees, private equity can benefit everyone. It can be advantageous.’

He adds that a private equity house can provide the capital needed to pay rent and staff, as well as invest in technology. Private equity can help finance longer working capital cycles in certain sectors.

‘Fletchers Solicitors has private equity money,’ Cheney explains, drawing on his experience with law firm clients. ‘This has enabled them to make acquisitions and invest in technology, so having access to external capital has been really helpful for them.’

On why more law firms don’t opt for private equity investment, Cheney notes: ‘The traditional law firm model has generally been effective at generating cash quite quickly. If you are working on advisory matters or an M&A transaction, you might be billing your clients on a monthly or quarterly basis, converting work in progress into cash more quickly than a litigation matter subject to a conditional fee arrangement (CFA). So, firms that are not reliant on CFA work are able to generate the cash they need more easily to pay the main overheads.’

‘Selling the family silver?’ Cheney adds: ‘It is a fair analogy, but my response would be that the family silver can increase in value with the support of external investment.’

Inflexion also owns law firm rankings provider Chambers and Partners, albeit that the private equity house is understood to be looking to sell that business. We ask commentators if owning Chambers could present a stumbling block for Inflexion’s acquisition of DWF.

One City corporate partner states: ‘The team that does the ranking and rating stuff at Chambers is incredibly separate from the private equity side. I would be very surprised if there was an issue.’

While another City corporate partner asserts: Inflexion and Chambers are both sensible organisations’, they added: ‘There could possibly be a conflict of interest. Chambers isn’t doing anything regulated. If Chambers isn’t sold by the time DWF is sold – you would take any rankings of DWF with a pinch of salt, but there are no rules regarding what Chambers can do. There are examples in the real world – like food reviewers owning shares in the restaurants they are tipping.’

Legal Business

DWF in talks to delist as private equity buyer circles

The board of DWF Group Plc has confirmed market speculation that it is in negotiations with mid-market private equity firm Inflexion over a potential buyout.

The UK’s largest listed law firm, DWF, released a statement on the London Stock Exchange, detailing that DWF shareholders will be eligible to receive a total consideration of 100 pence per share, including a cash consideration of 97 pence per share and a three pence per share dividend for the six-month period ended 30 April 2023, reliant on the sale going through.

The deal would value DWF at an estimated £342m.

According to the LSE statement, DWF has confirmed to Inflexion that, should a firm offer be made, it would ‘be minded to unanimously recommend it to DWF shareholders’, subject to terms and conditions.

It added: ‘Discussions between DWF and Inflexion are ongoing and there can be no certainty that an offer will be made, even if the pre-conditions are satisfied or waived.’

Following the firm’s announcement concerning the possible acquisition by Inflexion, DWF shares jumped by 40% to 92 pence per share on the 10th July, the highest value reached since September 2022, when share prices reached 88.2 pence.

DWF listed in 2019 amid a record £95m IPO and a valuation of £366m, heralding it as the UK’s largest listed law firm.

Since then, its fortunes have been mixed amid fluctuating share prices. The firm’s highest valuation was recorded just before the pandemic at 141.4 pence per share in February 2020, with a drop to 90 pence per share in March 2020 and an all-time low in June 2020 of 53 pence per share.

DWF’s full-year results, released in July last year, recorded a 4% uptick in overall revenue from £401m to £416m. Adjusted profit before tax also increased by a pacey 21% from £34m to £41m.

Inflexion is a London-based private equity firm which, according to its website, has £8bn of assets under its management, including legal directory Chambers and Partners.

At the time of going to press, DWF’s share price was down 4% to 84 pence per share.

Legal Business

Acquisitions pay off for DWF as firm reports striking 21% profit hike

DWF has lived up to its financial promises from last year, as acquisitions and a structural overhaul underpinned respectable growth.

DWF’s organic revenue, which does not factor in last year’s buyouts of compliance training company Zing 365 Holdings and Barnescraig & Associates, a Canadian insurance claims and loss adjusting business, was up 4% from £338m to £350m. Overall revenue was also up 4%, from £401m to £416m.

Profits were also healthy – adjusted profit before tax increased by a pacey 21% from £34m to £41m. Overall, the results more than live up to DWF’s prediction last year that its acquisitions would add ‘£3m of revenue and £500k of adjusted profit before tax.’

However, net debt stood at £71.8m, £11.6m higher than last year, which the firm attributed to ‘repayment of Covid-19 VAT deferrals and acquisition related payments.’ DWF also highlighted that the debt had reduced by £5.4m since its half-year 2022 results.

Chief executive Sir Nigel Knowles hailed the impact of the firm’s 2021 structural re-jig on the results – last year DWF streamlined into three global divisions of legal advisory, Mindcrest and connected services. Mindcrest is DWF’s process-led legal outsourcing arm, while connected services includes all the firm’s non-legal services such as claims management, costs and regulatory consulting.

Knowles said: ‘These results have been made possible through the continued transformation of our business, not least the successful implementation of our new global operating model which was introduced on 1 May last year. As anticipated, this has resulted in the greater integration and alignment of our colleagues and services, for the benefit of our clients.’

There were also notable client wins in the last year, with DWF winning a spot on the UK central government legal services panel, as well as new advisory roles for NHS Resolution, Allianz and LV=.

In light of the largely upbeat results, DWF will be paying a total dividend for the year of 4.75p, marginally above the 4.5p paid out last year.

However, Knowles is braced for headwinds. He concluded: ‘Despite the prospect of challenging macro-economic conditions, we remain confident in our medium-term guidance. This confidence is supported by the defensive nature of the group’s revenue being weighted towards litigation and the recurring revenue base in insurance, which has always protected the group both from artificial peaks in growth and hedges against a slowdown in transactional activity.’ 

Legal Business

DWF bounces back to form with two major bolt-ons and 120% profit uptick

After enduring a tumultuous pre-pandemic financial period, listed firm DWF has today (25 May) posted encouraging revenue growth matched by an ambitious double business acquisition.

The firm announced that it has acquired Devon-based compliance training business Zing 365 Holdings for £1.8m and also agreed to buy out Barnescraig & Associates, a Canadian insurance claims and loss adjusting business, for £2.2m. DWF predicts that the new service lines will add a healthy £3m of revenue and £500k of adjusted profit before tax in the next financial year.

Revenues shot up by 13% for the 2020/21 financial year to £338m, with the firm stating that 8% of that growth is ‘organic.’ Perhaps a greater cause for cheer was DWF’s £34m adjusted profit before tax figure, a welcome 120% rebound from the £13.8m reported for the same period last year. The firm asserts that the £34m profit ‘exceeds market expectations by c.15%’.

Historically DWF has been saddled with uncomfortably high levels of debt, and while the £61m recorded this time round is a slight reduction on last year’s £65m, the figure remains daunting. DWF stipulates however that this reduction was achieved despite ‘acquisition related payments’ of £17m, which paints a rosier picture.

As a result of the firm’s promising financials, DWF’s board has recommended a final dividend for the financial year of 3p per share, taking the total dividend for the year to 4.5p per share. The firm said: ‘This is the first step towards normalising the dividend towards the target pay-out ratio of up to 70% of the group’s profit after tax.’

On the week that marked his first anniversary as chief executive of DWF, Sir Nigel Knowles said: ‘We have grown the business, transformed our profitability, improved our operational efficiency and strengthened our balance sheet notwithstanding the impact of COVID-19 during the year. These results are testament to the resilience, dedication and excellence shown by our colleagues right across the business.

‘We have very clear differentiators versus the rest of the legal sector: we are the only main market listed global legal business, we have a unique client proposition which offers integrated legal and business services, and in Mindcrest we are the only law firm to own a market leading alternative legal services provider.’

The results are no doubt a welcome return to form for DWF, after being hit particularly hard by the pandemic. The March 2020 lockdown saw DWF revise its outlook for the financial year, pruning its growth forecast from ‘between 15% to 20%’ to around 11% – a significant repositioning based on just five weeks of trading.

Then in further cost-cutting measures from April 2020, DWF closed or reduced its outposts in Cologne, Dubai, Singapore, and Brussels. Long-serving chief executive Andrew Leaitherland departed and was replaced by chair and former DLA Piper figurehead Knowles.

Legal Business

‘Things are looking pretty good’: DWF continues recovery with strong half-year results after tumultuous 2019/20

DWF has continued its recovery in 2020/21, according to the firm’s half-year results, following a torrid year that saw debts rise and underlying profit plunge. 

The results announced today (10 December) reveal net revenue standing at £167.6m for the H1 period ending 31 October, an impressive increase of 15% on the £145.2m the firm posted for the same period last year. The firm’s organic revenue growth, meanwhile, stood at 3% while gross profit recorded a double-digit hike, rising almost 14% to £83.1m.  

Adjusted earnings before interest, taxes, depreciation and amortization also performed strongly, rising 17% to £24.7m from £21.2m in H1 of last year. Adjusted profit before tax likewise grew; up 23% to £13.4m from £10.9m.  

The figures we have recorded, of 15% revenue growth and 3% organic growth, stack up well against any of the peers in our group,’ firm CEO Sir Nigel Knowles told Legal Business. ‘Net debt is also continuing to come down and we are embedding a one-team culture across the firm that sees work shared across jurisdictions, offices, and practices, which has likely helped with the organic revenue growth.’ 

While the firm is still saddled with more debt than in H1 of last year, with the figure standing at £58.6m compared to £49.5m, it is significantly reduced from its £64.9m peak in April. A significant contributor to the firm’s rising debt level over the last calendar year has been large acquisitions – such as its £14.2m Mindcrest purchase and the £50m it invested in Spain – taking place just prior to the pandemic.  

However, according to Knowles the material output of Mindcrest has been a key component in its recent financial recovery: ‘We’ve seen business arising out of Mindcrest and have been generating revenue and improving margin from it. Clients are eager to see how we can help with managed services and the Mindcrest environment.’ 

‘Our managed services proposition is really starting to land with clients,’ add COO Matthew Doughty.GCs are increasingly under pressure to make cost savings and our managed services solution is helping them do that.’ 

Overall, the results continue a strong recovery for the UK’s largest listed law firm, which was forced to put in place a series of efficiency measures towards the end of 2019/20 after debt soared and underlying profits dived. According to the firm’s CFO, Chris Stefani, the Covid-enforced cost saving measures DWF adopted could be rolled back meaning parts of the business will ‘switch back on as things normalise.’  

As a result, Knowles is sanguine: ‘Other than litigation and big projects and large investigations no firm really has a massive pipeline of work at the moment. It’s all down to sentiment and confidence. We still have Brexit to get through and we need to get people vaccinated against Covid-19, but I think in terms of sentiment, things are looking pretty good.’ 

Legal Business

‘Match fit’ DWF rebounds after torrid finish to 2019/20

DWF has started 2020/21 strongly after a series of efficiency measures were put in place following a tumultuous end to the last financial year that saw debts rise and underlying profits plunge, the firm’s delayed financial results show.

For 2019/20, revenue at DWF rose 11% to £297.2m, up from £268.2m last year. Despite the double-digit hike, the performance is still below the firm’s revised expectations announced in March, when DWF suggested total revenue growth would land between 15% and 20% as the Covid-19 lockdown impacted the firm’s year-end. Underlying organic revenue growth was also below the revised expectations, with the figure growing 2% due to the difficulties encountered in Q4. The firm suggested in March the figure would undergo a ‘high single-digit’ increase. 

While gross profit saw a marginal decrease of 1% to £142.2m from £143.4m, more concerning was the firm’s underlying profit before tax – the figure excluding one-off investments – which was down a hefty 32% to £13.8m. Likewise, the firm’s underlying adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was also down, decreasing by 22% to £21.8m.

‘We were having a decent year in 2019/20 following our expansion strategy,’ DWF’s CFO Chris Stefani told Legal Business. ‘But in the final quarter Covid hit and that saw a strong decline in instructions and why revenue delivery was much lower than expected. While we still grew revenue by double digits, the shortfall hit profitability.’

Moreover, the firm finished the year saddled with more debt – something DWF has always struggled with. For the year to 30 April, the figure stood at £64.9m, compared to £35.3m in 2019. According to Stefani the increase in debt was mostly an ‘accident of timing’ due to large acquisitions – such as the £50m DWF invested in Spain and its £14.2m Mindcrest acquisition – taking place just prior to the pandemic.

Such was the dire situation at DWF, the firm ousted long-term leader Andrew Leaitherland and appointed chair and former DLA head Sir Nigel Knowles as CEO.

Despite a difficult 2019/20, DWF’s trading update for the beginning of 2020/21 made for better reading. The firm saw net revenues up 20% for the first three months of the financial year, with organic growth coming in at 5% while underlying adjusted EBITDA was up 145%. Net debt, meanwhile, had been reduced in the period, with the figure dropping by almost £10m from its peak in April.

Speaking to Legal Business, Knowles said: ‘What we needed to do was join up the business. When you were once a UK firm and become a global firm, you have to look at the costs you inherit. We needed to create a sustainable platform to ramp up business and we’ve spent a lot of time getting us match fit for the future.’

Despite the strong start to the year, the firm is maintaining its initial financial forecast. As of this 9:30am this morning (08 September) its share price stood at 62p. 

Legal Business

Comment: Falling stock – DWF’s predictable woes will hang over the listed legal sector for years

It’s fair to say that Legal Business has long been sceptical of the prospects for listed UK law firms, and none more so than the most hyped of the lot, DWF. ‘The 2020s still look likely to end with public markets as a marginal force in global law,’ noted our recent cover feature on the big issues set to shape the profession through the current decade. And that assessment was written before the coronavirus pandemic, a jolt that is about to put the weaknesses of the listed law firm model to a savage test.

So in this context the news on Friday (29 May), that the UK’s largest listed law firm DWF was dispensing with the services of its long-term leader Andrew Leaitherland amid pressure on its business is both surprising and yet much foreshadowed.

Surprising because as chief executive and managing partner, Leaitherland had been the visionary driving the north-west player from the £34m outfit he took over in 2006 to the £272.4m DLA-in-waiting it aspired to be on the UK and international stage.

It was Leaitherland that got stuff done and marshalled the partnership with admirable energy, through a string of acquisitions, the 2017 recruitment as chair of one Sir Nigel Knowles and the biggest-ever UK legal float two years later. And all this was intended to be merely the opening chapters in a saga taking DWF to the kind of challenger-at-scale status pioneered by Knowles’ former parish, DLA.

And yet Leaitherland’s departure, with Knowles taking over as chief executive and the board briefing on concerns regarding DWF’s business model, came after issues that had been repeatedly flagged by many in the industry.

Announcing the change in leadership, DWF cited a material impact on its business in April as the lockdown gripped the economy, slashing its 2019/20 growth forecast from ‘between 15% to 20%’ to around 11%, a startling revision based on five weeks of trading.

Other bad news in the statement included that its commercial practice saw revenues decline 6% annually, a flashing red light that speaks to issues well beyond Covid-19, while growth lagged expectations in its managed services and New Law arms. Its international business, a core part of its game-plan, still generated 50% growth from a relatively low base, but saw particular problems with its Middle East and Continental European practices.

While issues with its international network can be dismissed as plain bad luck, much of the wider malaise goes further than the current pandemic. The most striking point in the Friday statement is that DWF ended its financial year with net debt at £64.9m, a performance deemed ‘better than expected’. How can I put this charitably? I can’t: DWF’s borrowings have looked excessive for years and that is far too much debt to be comfortably held for a law firm generating in the region of £300m. That would be the case for a conventional law firm with the kind of profits typical of a UK top-50 player, does it need saying that it is doubly relevant for a listed firm with thin margins by the standards of its peer group? Apparently so.

Such issues go a long way to explaining the pronounced scepticism regarding DWF well before the float. Aside from debt issues, critics often cited what they argued was an opaque balance sheet, lack of clear organic growth, low profitability and high partner/fee-earner leverage.

Despite the initial talk of a £1bn valuation, many advisers and bankers specialising in legal floats were surprised DWF got its market cap above £250m, let alone the £366m they managed in March 2019. And don’t forget that the costs of legal floats are considerable, DWF’s all-in associated bill for its float was around £20m, a huge drain on capital.

There was also much chattering about how successful DWF’s much-touted efforts in managed legal services were, with its flagship deal with BT seen as more profile-raiser than good business, given the tough rates it signed up to. Moreover, there was a notable lack of bluechip clients following BT’s lead.

There will also be some raised eyebrows at DLA at the notion of Knowles stepping in to sort out these issues. Knowles has a justifiably big reputation in the industry for his vision in remaking DLA Piper as a global force. He has flair, charisma and energy in spades but also in the latter years of his run at DLA was felt to be wanting in the nitty gritty of operational issues. This resulted in DLA spending five years after his departure upgrading its operations and financial management to address weaknesses that had built up as governance failed to keep pace with the size of the firm. With DWF apparently needing a change of style, it is open to debate if appointing Leaitherland’s barely-concealed role model to replace him is the obvious answer. By the same token it is hard to have much sympathy with DWF’s board on this pivot, the majority of these fault lines were plain to see even as DWF continued its acquisition and recruitment spree through early 2020.

In such a context, the sharp fall in DWF’s share price, from around 140p in February to as low as 66p on Friday is hardly a surprise. DWF notes that trading has improved in May and cites an expected £23.5m in cost savings by the end of the 2021/22 financial year. Major retrenchments looks inevitable, bitter medicine for a firm used to the dash of growth.

But if the outlook for DWF looks bleak, it does not appear much better for listed firms in general. Such firms are essentially growth plays and remain acutely vulnerable to the kind of sharp downturns that are currently gripping the UK and global economies. There are three reasons for this vulnerability. Firstly, their client-bases usually have more exposure to SME clients than typical for a top-50 UK law firm, directly impacting their clients’ ability to pay in hard times. Secondly, their corporate structure, forcing triangulation between outside investors and partners, gives them far less room for manoeuvre than a traditional law firm amid the struggle to satisfy conflicting agendas. Lastly, such firms are forced to operate on thinner margins having given up a large chunk of partner profits to create a corporate pool for investors (a whopping 60% of partner profits in the case of DWF). You can argue this is a more honest accounting than the fiction of treating all equity partner earnings as profit but it also gives firms a thinner effective cushion when the bottom falls out of the market. For context, pre-float, DWF had a profit margin of just 11% and fielded 14 fee-earners for every equity partner. All these substantive issues with the business model come before you even consider the additional disclosure burden forced on listed law firms at their moment of greatest stress.

True, some of the other handful of law firms that have listed in the UK are regarded as being far more conservatively run than DWF and will likely now reap relative rewards for that prudence. But there is no getting around the fact that floating a law firm is a risky business, with uncertain rewards at the best of times. The notion of listed law firms redefining the UK legal market is now effectively dead for a decade, at the very least. For its part, DWF will have more pressing practical matters to hold its attention for the foreseeable future.

For more analysis on floating law firms and DWF see our 2018 cover feature, ‘No free lunch 

Legal Business

DWF flags Covid-19’s ‘material impact’ on profit and increased debt as Keystone declines dividend

The UK’s largest listed law firm, DWF, expects the fallout from the Covid-19 pandemic to have a material impact on its profit and has entered talks with its lenders to extend its £80m credit facility and relax certain covenants.

DWF provided a trading update to the London Stock Exchange today (27 March), setting out the board’s expectation that revenue for the year to 30 April 2020 would be below previous expectations. The final quarter of each financial year is typically the most important to its financial performance, the firm said, which coincided with the coronavirus outbreak.

The firm said organic revenue growth for the year is now expected to be ‘high single-digit’ and total growth between 15% and 20%. The lower revenue and level of investment during the year – including more than £50m spent on acquisitions in Spain and a managed services business  – is therefore expected to have a ‘material impact’ on profit.

Insurance and international work were expected to deliver most of the revenue growth this year, driven by international despite some issues in a number of locations due to Covid-19. Insurance is now trading ahead of management’s expectations, while litigation is also said to be less affected by the economy.

Net debt is now also expected to be higher than anticipated this year, given the lower profits and with slower collections in the current business environment. DWF has a revolving credit facility with HSBC, NatWest and Lloyds of £80m and currently expects to operate within its limits, but has entered ongoing discussions with its lenders.

‘The board believes it prudent to seek additional contingency facilities from its lenders to ensure that the group has increased headroom for working capital purposes and a relaxation of certain covenants for a period of time,’ the update said. ‘While the current environment is unprecedented, the board is confident that the group is well placed to continue to provide best service to its clients and benefit from future opportunities when the business environment normalises.’

Meanwhile, fellow listed law firm Keystone has followed Gateley, Knights and Ince in similarly providing a trading update to the market. The firm said it believed its model – in which its lawyers work remotely anyway and their fees amount to about 75% of the revenue they generate – meant it was in a strong position to deal with the impacts of Covid-19.

The firm, which operates on a financial year to 31 January 2020, said it was currently unable to assess any impact for the next financial year but would not be recommending a final dividend for this year given the uncertainty.


Legal Business

DWF continues global expansion with £14.2m managed services play

DWF has continued its expansionist strategy following last year’s initial public offering (IPO), dipping into its war chest to acquire managed services company Mindcrest in a £14.2m deal announced today (29 January).

Chicago-based Mindcrest offers managed services across contract management, compliance, legal analytics, litigation and investigations for international corporates. The majority of the business’s staff are based in Pune, India, where it has operated for over 15 years, but smaller offices are spread across Chicago, New York and London. The business has expected sales of £9.2m for the 2019 financial year.

‘It’s about growth and our stated strategy of building a global managed services business,’ DWF CEO of managed services Mark Qualter told Legal Business. ‘It also de-risks it for us, as Mindcrest is a proven business and serves our global operations. The geography works for us, as we can serve the US, Europe and down into Australia.’

DWF also anticipates the acquisition will allow the firm to pursue new revenue streams and achieve cost savings of up to £2.9m for the 2022 financial year, with the business’s Pune office providing an established low-cost legal services and outsourcing location. The deal is structured so DWF will pay £1.8m in cash and £6.5m in shares which will be payable upon completion, while £5.9m will be exchanged in deferred cash. When finalised, DWF will have offices in 33 locations with an overall headcount of around 4,200.

The move is the latest in a string of post-IPO plays by the firm. In December, DWF announced the acquisition of 40-partner Spanish law firm Rousaud Costas Duran in a £42.5m deal, the firm’s largest to date. The announcement came alongside DWF’s half-year results, with revenue for the six months to 31 October growing 10% to £146.8m, of which organic growth was said to be 7%.

The firm’s first splash came earlier in May of last year, when it acquired K&L Gates’s 11-partner Warsaw office. Later in October it also brought its post-float sales pitch to Germany after opening its fourth base in the country in Düsseldorf.

However, according to Qualter, further acquisitions in the managed services space are likely: ‘During our IPO process we talked about achieving global centres. We were looking at Pune, which we have now done, and Chicago, which we have now done. We were also looking at Australia which we are working on and central Europe which we’re looking at.’

Legal Business

‘International is the growth engine’: DWF eyes US after £42.5m Spanish acquisition

DWF is looking to crack the US market with an acquisition which would likely surpass its £42.5m deal for a Spanish law firm announced today (11 December).

The firm, which became the UK’s sixth and largest law firm to list in March this year, announced the acquisition of 40-partner Rousaud Costas Duran (RCD) alongside its half-year results, adding 400 staff across offices in Madrid, Barcelona and Valencia. RCD reported revenue of €35.7m last year.

The deal is worth up to £42.5m, DWF’s largest acquisition, comprised of up to £19m in cash and the remainder in DWF shares. It cements a relationship of more than a year between the firms, which led to an exclusive association in June 2019.

DWF chief executive Andrew Leaitherland (pictured) told Legal Business Spain was one of the regions the firm identified in its prospectus for growth, alongside Poland – where the firm made a £3m acquisition of K&L Gates’ 11-partner Warsaw office in May – Canada, the US and the Netherlands. He said there was significant overlap between the two firms’ clients in real estate, financial services and insurance.

‘Spain will become more important going forward should Brexit go through,’ he commented. ‘Through the association we had the ability to get to know them and there’s a strong cultural alignment, they’re all about delivering legal services in a different way. It’s a very credible platform from which we can scale.’

DWF’s revenue for the six months to 31 October 2019 grew 10% to £146.8m, of which organic growth was said to be 7%. The firm’s international arm, which also saw an office opening in Düsseldorf and hires in Newcastle, Australia, grew 28% to £33m.

‘International continues to be the growth engine of the business,’ Leaitherland said. ‘RCD is a good illustration of how we’re going to go about that moving forward.’

He told Legal Business DWF had the ability to make larger acquisitions and would likely need to as it sought to enter the US market, where it has had a similar exclusive association with Los Angeles-based Wood, Smith, Henning & Berman since October 2018. The US has stricter restrictions on outside ownership of law firms but Leaitherland is confident the firm can find the right model, particularly having spent £20m on the IPO, including a large proportion on regulatory advice.

‘The US is unlikely to be a small deal because it’s such a big market. There’s opportunities in all of our target markets but needless to say, the US in particular is the largest litigation market in the world so it’s a market that we’d love to be in,’ he commented. ‘We’ve found structure to accommodate it in other territories and we’re confident we can do the same in the US.’