DWF premium lacks attraction of legal peers

DWF is the first lawyer to float on the Main Market. It is a global business with offices in Europe, Australia and Asia. DWF has grown organically and via acquisitions and there are still consolidation opportunities.
There are already quoted legal firms, but Gateley (LON: GTLY), Gordon Dadds (LON: GOR), Keystone Law (LON: KEYS), Knights Group (LON: KGH) and Rosenblatt (LON: RBGP) are all quoted on AIM and are also smaller than DWF. However, most have better growth prospects, although they do not offer the international spread of activities that DWF does.
Considering DWF’s pro-forma post-tax profit was £12m in the year to April 2018, even adjusting for the cash being raised, the historic multiple is above 20. There is also the likelihood of selling from employee shareholders after the 2019-20 results are published as one-fifth of their shareholdings are released from the lock-in agreement with employee shareholders.
That is still more than one year away, but there will be shares released from the lock-in in each subsequent year for four years. That is plenty of supply and it is not clear if there will be demand for them.
A promise to pay up to 70% of post-tax profit in dividends is an undoubted attraction, but the other quoted legal firms also offer attractive income potential and higher potential yields.
There is better value elsewhere in the sector.
DWF Group
Global legal services provider
Premium listing
Flotation date: 15 March 2019 (Conditional 11 March)
Issue price: 122p
Amount raised: £75m
Expenses: £22m
Market capitalisation: £366m
Brokers: Stifel Nicolaus / Jefferies / Zeus

What does it do?

Lawyers have been able to become corporate entities since legislation was passed in 2007, thirty years after the original DWF business was founded, and the business became DWF LLP. This was followed by international expansion.
DWF has been restructured with DWF LLP, which includes the UK, Brussels, Italy, Qatar and Singapore operations, being turned into a plc. There are 27 offices.
The business is split into four divisions: commercial services, insurance, international and connected services.
Commercial services is the largest revenue generator and encompasses corporate services, such as business restructuring, finance and tax, litigation and property law. There is potential additional business from Brexit.
The insurance division includes legal services for professional indemnity, personal injury, motor, fraud and claimant practices. Insurance companies are reducing the size of panels of lawyers they deal with, thereby increasing the potential business for the remaining firms.
The international division includes the global activities. Connected services are operations that provide products and services to the lawyers and clients. The market for additional services, such as claims management and loss adjusting, is fragmented in the UK and internationally.
The global legal market is expected to grow from £653bn in 2017 to £778m in 2021. The UK is the second largest market, after the US, accounting for £33.3bn – 5% of the global market. These revenues have grown at a compound annual growth rate of 3.4% between 2013 and 2017.
DWF is ranked 23rd among the top UK legal firms, according to The Lawyer.
DWF is keen to continue to be a consolidator of the legal sector and move into new regional markets. Acquisitions are assessed on cultural fit, the client base, financial potential and the performance of key fee earners.


Although DWF is raising £53m after expenses, just over £18m will go towards repaying members’ capital contribution to DWF. That leaves £11.1m of members capital on the pro forma balance sheet. Pro forma net debt is £20.7m and pro forma net assets are £58.3m.
Legal technology is becoming increasingly important in order to make lawyers more efficient and up to £10m of the cash raised will be invested in IT systems.
In the year to April 2018, pro forma revenues were £236.5m and pro forma pre-tax profit was £14.8m – adjusted for the members’ remuneration and profit shares.
In the six months to October 2018, like-for-like revenues improved from £112.7m to £133.4m, although the latest reported revenues were £157.1m, because it includes £23.8m of recoverable expenses following the IFRS15 accounting regulation changes. The latest period includes £8m of flotation fees, following £1.45m of float costs in the previous 12 months.


Sir Nigel Knowles is chairman and he was at rival DLA Piper for more than 38 years, rising to senior partner. He is also chairman of Zeus, lead manager of the flotation, and a director of AIM-quoted finance provider Morses Club.
Annual fee: £200,000
Andrew Leaitherland is chief executive and he has held that position since 2006, during which time DWF has grown from two to 27 offices around the world.
Annual salary: £530,000
Chris Stefani has been finance director since April 2016 and he previously worked at Ernst & Young.
Annual salary: £320,000
Matthew Doughty is partner director and held the same position at DWF LLP since 2016.
Annual fee: nil (Salary earned as a fee earner at DWF)
Chris Sullivan is senior independent director and he is a former executive at Santander and the Royal Bank of Scotland.
Annual fee: £75,000
Teresa Colaianni is an independent non-executive director and she is a former human resources director at Merlin Entertainments and Hilton Hotels.
Annual fee: £72,500
Vin Murria is an independent non-executive director and she has built up two AIM-quoted software companies that were subsequently taken over. She is a director of private equity firm Elderstreet and broker finnCap.
Annual fee: £65,000
Luke Savage is an independent non-executive director and he is a former finance director of Lloyd’s of London and Standard Life.
Annual fee: £72,500
Samantha Tymms is an independent non-executive director with experience in the financial services sector and she is a director of IG Group. She has worked at the Financial Conduct Authority.
Annual fee: £72,500


The directors and senior management own 8% of DWF, with chief executive Andrew Leaitherland owning 2.4%.
The trustee of the employee benefit trust owns 7.5% of DWF, while the trustee of the reward share trust owns 3%.
One-fifth of each DWF-employed individual’s shareholding will be released from lock-up after the announcement of results for the year to April 2020 and 10% for each of the next four full year results announcements, plus an additional 10% each year depending on performance. It is possible for some shares to be clawed back by the company.
Miton Group (4.4%), Sand Grove Capital Management (4.1%) and Standard Life (4%) have bought shares in the flotation.

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Andrew Hore
Andrew Hore is the publisher of AIM Journal, which is an online monthly publication covering the Alternative Investment Market.