DHR International Takes Aim at Canada’s Caldwell

July 6, 2015 – Private equity-backed DHR International Inc. may have only gotten started on a consolidation effort in the executive search firm space by recently completing a deal with CTPartners Executive Search Inc., because the Chicago- based firm seems to have eyes for one particular firm north of the border. As of Monday, DHR had amassed about 5.1% of C-suite search firm Caldwell Partners International Inc., Canada’s only publicly traded company in that particular executive search specialty. Wholly owned by Wilmette, Ill., private equity firm Osprey Capital LLC, DHR said it ultimately hopes to buy Toronto- based Caldwell in its entirety.

“[Caldwell] would line up incredibly well with DHR, specifically with the CTPartners folks we brought on,” DHR CEO Geoff Hoffmann said in a Monday phone interview.

Hoffmann went on to explain that in order to remain competitive in the executive search space, DHR constantly looks at opportunities to grow from both an industry and geographic perspective.

Hoffmann’s father, David, the principal and founder of Osprey, added in Monday’s phone call that he is scheduled to speak with Caldwell CEO and chairman John Wallace on Tuesday evening regarding DHR’s interest in Caldwell.

“We’re their third-largest shareholder right now,” said David Hoffman, who also serves as DHR’s chairman. “We plan to continue to buy [Caldwell’s] stock and plan to continue to have discussions with them.”

Geoff Hoffmann initially met with Wallace in Toronto on June 15 with presentation materials that expressed DHR’s interest in a transaction with Caldwell, according to letters the DHR CEO has sent to the board of Caldwell that have been obtained by The Deal.

While a spokesman with Caldwell declined to comment on Monday, the letters indicate that the Canadian firm is resistant to a transaction in the near term.

“Mr. Wallace, while indicating an understanding of the business thesis underlying DHR’s interest in Caldwell, responded that consideration of recent developments and initiatives at both companies, DHR should ‘wait a year or two’ before pursuing its interest in Caldwell,” a July 1 letter to the board of Caldwell states. “Mr. Wallace also stated that DHR would effectively be unable to pursue its interest in a transaction, even at a premium, in light of his ability to effectively control 51% of the outstanding shares.”

The documents state that DHR has the financial capacity to complete a deal with its available cash, absent any third- party financing. Caldwell generated C$24.3 million ($19.2 million) over the six months ended Feb. 18, up from C$19.5 million over the same period a year earlier.

Caldwell is anticipated to generate $40 million to $50 million in the current fiscal year, according to Scott A. Scanlon, founding chairman and CEO of Greenwich, Conn.-based Hunt Scanlon Media LLC, a research firm focused on the talent management industry. He based that range on the addition of a London office to Caldwell’s business, as well as a better exchange rate for the Canadian dollar.

“I’m really bullish on the Canadian market,” Scanlon said via phone. “There’s huge room for growth in the executive recruitment industry [in Canada]. [Caldwell] would be a terrific acquisition for DHR.”

“If DHR was looking to quickly ramp-up in Canada, Caldwell is certainly a place to look,” said search firm veteran Jay Rosenzweig, the founding partner of Toronto-based Rosenzweig & Co., a boutique executive recruitment firm.

Canada is a compelling place that is sometimes overlooked, Rosenzweig said, pointing to the country’s stability from both an economic and political perspective.

“Search firms that don’t have a Canadian footprint are at a global disadvantage,” added Chris Pantelidis, the global head for executive search firm EMA Partners International’s Global Payments & Transaction Service Practice. “Because of that growth and the healthy economy for the most part — there’s the dip in oil and gas — you have some very healthy search practices here that are doing quite well.”

Many of the firms Pantelidis is speaking of have the potential to be acquisition targets, he said, adding that he also anticipates a few initial public offerings in the next couple of years.

And even beyond Caldwell, DHR is poised to remain a consolidator in the search firm space now that is long pursuit of CTPartners is behind it.

DHR didn’t buy CTPartners in full, but the search firm revealed on June 23 that it had reached nonbinding terms with CTPartners’ lenders outlining an acquisition of assets, including 17 offices and 250 employees.

The deal, for undisclosed terms, was completed on the night of July 1, The Deal has confirmed.

“CTPartners was great because we’ve ended up with around 175 people in Europe and that’s really where we wanted to accelerate our growth,” David Hoffmann said, noting the significant position the company gained in Eastern Europe. “We see the same opportunity with Caldwell.”

“We have one other public company in mind after this one,” he added.

“We have a bunch of different opportunities we’re looking at,” Geoff Hoffman stated.

Outside of DHR, one likely North American buyer in the executive search industry could be Heidrick & Struggles International Inc. (HSII), which on July 1 announced it had boosted its revolving credit facility to $100 million from $75 million.

By terminating its $26.5 million term loan facility and transferring its outstanding balance to its amended revolving credit facility, Heidrick & Struggles has approximately $73 million available on its credit facility, according to the announcement.

“The fact that they increased their credit facility in this economy might point to the fact that they’re also looking at growing the business by acquisition,” Scanlon said.

A spokesperson with Heidrick & Struggles declined to comment on Monday.

Meanwhile, there are numerous privately-held boutique and specialty search firms in North America ranging anywhere from about $5 million to $60 million in annual revenue.

“These small boutiques are not constrained in terms of how they grow or the direction they grow in,” Scanlon said. “It makes sense for big firms to come in and acquire them.”

Among the fastest-growing boutique firms is True, officially the True Capital, which specializes in emerging technology in North America, Europe, Middle East and Africa. Launched in 2012, True grew its top line by about 90%, to $18.2 million, in 2014, Hunt Scanlon data showed. The co-founder of True, Brad Stadler, sold his previous firm, Iron Hill Partners, to Heidrick & Struggles in 2008.

Other firms on the rise include ZRG Partners LLC, which is among the first midsized talent providers to raise capital. ZRG grew 45%, to $9.4 million, in 2014 revenue. There’s also Schweichler Price Mullarkey & Barry (SPMB), which had a 36% growth in sales, to $18.3 million, in 2014.

“Coming out of the global financial crisis, there was a lot of pressure on niche, boutique firms,” Geoff Hoffmann said. “By and large, being a small generalist firm, or even midsized firm, is pretty difficult. That’s why you’ve seen somewhat of a consolidation.”

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