Davis + Henderson to acquire Mortgagebot

Source: Davis + Henderson

Davis + Henderson Corporation ("D+H") (TSX:DH) today announced that it has entered into an agreement to acquire Mortgagebot LLC ("Mortgagebot") of Mequon, Wisconsin (the "Acquisition") for a purchase price of US $231.8 million, payable in cash. The Acquisition is expected to close on or about April 12, 2011, subject to satisfaction of customary closing conditions.

Strategic Rationale

Mortgagebot is the leading provider of web-based mortgage point-of-sale solutions in the United States. Founded in 1997, Mortgagebot provides a range of consumer direct, loan officer and branch and call centre mortgage origination solutions for nearly 1,000 banks and credit unions. Mortgagebot has been consistently recognized by leading US publications and industry analysts for its growth and leadership of online lending services technology. Its PowerSite platform was branded "the de facto origination tool" by Cornerstone Advisors.

"By acquiring Mortgagebot, D+H further advances our strategic diversification agenda, we extend the range of integrated solutions we offer within the financial services marketplace, and we add an important dimension to our capabilities in a core lending services area", said Bob Cronin, CEO of D+H. "As a proven business with a track record of innovation and growth, Mortgagebot gives us a solid position with a large number of new customers within the US financial services marketplace. We are very pleased that Scott Happ, Mortgagebot's founder, President and CEO, and his team will be joining us to execute our shared growth plans."

Financial Benefits

Mortgagebot is a profitable, privately-held business with 2010 revenues of $37.7 million and normalized EBITDA┬╣ of $20.2 million, both translated into Canadian dollars and determined under US GAAP. Mortgagebot is expected to deliver positive cash flow that supports dividends at current levels and provide modest accretion to adjusted earnings1 for D+H shareholders in the latter part of 2012. With the acquisitions of Mortgagebot, and Asset Inc. earlier this year, the services and revenues of the combined business will continue to expand and become more diversified. On a pro forma basis, revenues from services to the lending market will comprise approximately 54% of D+H's revenue, with programs to the chequing account representing approximately 40%. Over the past five years, D+H has completed several acquisitions that have supported this substantial evolution of the business.

Growth Plan

"Mortgagebot has experienced solid growth by capitalizing on its many strengths - including its leading market share and reputation, strong customer service ethic, and innovative technology - which combine to create strong value to customers", said Gerrard Schmid, President and COO of D+H. "The current adoption rate among U.S. financial institutions for consumer-directed online mortgage origination is estimated to be about 20% and growing. As a market leader, Mortgagebot is positioned well to participate in this growing target market. Today Mortgagebot meets the needs of a range of financial institutions, from large 1200+ branch banks through to small community banks and credit unions. On a business as usual basis going forward, we will continue to build on Mortgagebot's leadership position in online mortgage origination."

Strengths

Mortgagebot revenues are principally derived from long term contracted subscription fees, which represented approximately 73% of 2010 revenues, with variable transaction fees making up the largest component of the balance. With customers typically served under long-term contracts, the operating and business model has proven to be solid, allowing Mortgagebot to grow both revenues and profits through the difficult markets of the past two years.

"Since our founding, we have achieved growth within a variety of market conditions," said Scott Happ, founder, President and CEO of Mortgagebot. "In fact, our annual revenue growth has averaged 13% over the past four years by helping our customers take advantage of the growth and cost savings associated with online mortgage originations. We believe that by being part of D+H, we can bring the benefits of our technology and expertise to an even larger segment of the US and Canadian financial services marketplace."

Acquisition Financing

The US$231.8 million purchase price, and transaction expenses, will be funded through the issuance of $121.8 million of new equity (the "Offering") and $115 million of new borrowings. To support the Offering, today D+H entered into an agreement with a syndicate of underwriters, co-led by TD Securities and RBC Capital Markets, under which the underwriters have agreed to buy 6,000,000 subscription receipts ("Subscription Receipts") for sale to the public at a price of $20.30 per Subscription Receipt for gross proceeds of $121,800,000. Each Subscription Receipt represents the right to receive one common share of D+H for no additional consideration on the closing of the acquisition of Mortgagebot. The proceeds from the offering of Subscription Receipts will be deposited in escrow pending closing of the acquisition. If the acquisition closes on or before May 31, 2011, the gross proceeds from the offering of subscription receipts will be released to D+H and used by it to pay a portion of the purchase price of the acquisition. If the acquisition fails to close by May 31, 2011, or the acquisition is terminated at an earlier time, the escrow agent will return the gross proceeds and pro rata entitlement to interest thereon to holders of the Subscription Receipts.

Completion of the Offering is subject to certain conditions including normal regulatory and stock exchange approvals. The Subscription Receipts will be offered in all provinces of Canada by way of a short form prospectus. The closing of the Offering is expected to occur on or about April 12, 2011.

Additionally, D+H has received a commitment from its existing lending syndicate to make available an additional credit facility of $100 million, thereby providing additional borrowing capacity in support of the Acquisition. Along with these commitments, the Corporation's lenders have agreed to extend the maturity date of the bank borrowings to April 2016 from June 2013. D+H expects to issue an additional bond in the amount of US$63 million, which will comprise part of the $115 million of new borrowings described above, with a ten year maturity date, to one of its existing bond lenders.

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