DST Systems Has PE Firms’ Interest

(Reuters) – DST Systems Inc has received several buyout overtures from private equity firms in recent months, including one led by activist investor Russell Glass, according to people with knowledge of the situation.

Glass, founder and head of New York investment firm RDG Capital, told Reuters he had teamed up with a private equity firm and approached DST management within the last 30 days to talk about a buyout of the diversified data processing company in the mid-$60s per share range.

DST also held discussions in March and April with another private equity firm that was also eyeing a mid-$60s price range, a source close to the situation said.

Glass said he was rebuffed by DST management on grounds that the company did not want to sell while it is grossly undervalued.

A $65-per-share bid would value DST at about $3 billion, or a 35 percent premium to its Tuesday closing price of $48.31. But in 2007, DST’s stock had traded at around $83 per share.

The other private equity firm had also been rejected, while the mid-$60s range appears to be the starting point, said the source, adding, “You have to be prepared to bump or compete with other buyers.”

The source requested anonymity because the talks are not public. A DST spokeswoman declined to comment.

Glass, who has taken a minority position in DST within the past two years, said the company’s management confirmed to him that DST had received interest from three other private equity firms in recent weeks.

“We would like the company to hire an investment banking firm to consider strategic alternatives, including a sale or auction,” said Glass, who previously was a senior executive for billionaire investor Carl Icahn.

A Reuters Insider analysis suggests a break-up value for DST at above $70 per share.
DST, which focuses primarily on providing accounting software to the mutual fund industry, also processes data for both the financial services industry and the fast-growing healthcare information technology sector.

Over the last decade, DST has branched out to invest in a number of real estate subsidiaries, equity securities and private equity funds.

But since the credit crisis, the company has struggled to recover. It currently trades at roughly four times earnings before interest, tax, depreciation and amortization (EBITDA) adjusted for cash and securities.

That is well below peers in the financial processing segment, such as Automatic Data Processing and Fidelity National Information Services Inc, which trade at between 8 to 11 times EBITDA.

Past transactions in the financial services sector have also topped those multiples.

Last year, Bank of New York Mellon bought PNC Financial Services Group Inc’s global investment servicing unit for $2.31 billion, or 18 times EBITDA. Fidelity National bought Metavante Technologies in an all-stock deal valued at more than $2.9 billion, or 9 times EBITDA.

“We have held discussions with DST management about a proposed buyout at a price range in the mid 60s, which we believe represents a fair premium,” said Glass.

DST may be attracting interest from private equity because financing would not likely be an issue. A buyer could use DST’s cash, securities — including about $500 million worth of shares in State Street — and other assets to offset its roughly $1.14 billion in debt.

That would reduce the enterprise value of the company to roughly $1.5 billion, and private equity could easily write an equity check to finance a deal in the $700 million range, Glass said.

As discussions remain friendly, neither Glass nor the source said they have spoken to DST’s leading shareholder and board member, George Argyros, who holds a 20 percent stake in the company.

Argyros, who served as the former U.S. Ambassador to Spain and is currently chairman and chief executive officer of real estate company Arnel & Affiliates, has held stock in DST for more than a decade.

“I am a long-term holder. I think the company is a well-seasoned company, they know what they are doing and they are expanding into other things,” Argyros told Reuters.

He said there is no question that DST is undervalued, but the company is worth more than an offer in the mid-$60s range.

Argyros said he was anxious for DST shares to trade back to the $80s range. “I’m optimistic of the company’s strategy. They are starting to move in the right direction,” he said.

(Reporting by Nadia Damouni, editing by Tiffany Wu, Gary Hill)