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Duff & Phelps Corporation Price Is Not Overly Rich, but Does Offer a Nice Premium

Duff & Phelps announced Sunday afternoon that it has agreed to be purchased by a consortium led by Carlyle, Stone Pointe Capital, and Rothschild Group for $15.55 per share. This represents a 19% premium to the closing price last Friday and a 27% premium to the average share price of the last 30 days. The purchase price is a touch below the company’s 2007 IPO price of $16 per share. The implied valuation is 14 times our 2013 EPS estimate (15 times our 2012 EPS estimate), and the implied enterprise value is 6.3 times our 2013 EBITDA estimate (6.8 times our estimate for 2012); although the EBITDA multiple is about 0.6 turns higher if we include unvested shares that are not included in the average diluted share count. These valuation ratios are roughly in line with or a touch below the peer group averages of 14.5 and 7.3 times, respectively.

The company will have a go‐shop period until February 8, when other bidders could offer a better price. The break‐up fee is only $6.65 million (1% of transaction value), which is relatively low, in our view. Given management’s participation in the announced deal, we find it somewhat unlikely that a financial buyer offers a better price, even though the implied valuation is not overly high as a take‐out price. A strategic buyer could potentially offer a better price, since cost synergies from a strategic merger probably would easily outweigh the break‐up fee. However, while we don’t believe the company was ever formally “for sale” in an auction, we believe that Duff & Phelps’ management team has been receptive to a deal for a while. We believe that this has been known by many executives in the industry. We believe that competitors such as FTI Consulting (FCN $32.33; Market Perform) and Navigant Consulting (NCI $10.91; Market Perform) likely have at least considered the idea already, but ultimately decided not to pursue a transaction at various points in the past. Therefore, we believe that those firms would have to have a change of heart spurred by the news of this deal. Overall, we think the most likely outcome is that the transaction proceeds as announced, although there is a chance that a competing offer emerges from a strategic buyer.

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