Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Greenhill & Co. is undeniably struggling, but there are ways it can get on firmer footing.

The boutique firm's market value has shrunk to below $500 million after a dive in advisory revenue sparked a similar swoon in the company's shares. Poor second-quarter results only reinforced the fact that Greenhill is stuck in a rut, unlike competitors who are better weathering the regulatory and political uncertainty that's impeding some big-ticket mergers and acquisitions. 

Absent a massive second-half haul of advisory fees (which is highly unlikely if not impossible), Greenhill is on track to post its worst annual revenues since 2008, near the depths of the financial crisis. And some investors are betting it will get worse: Short interest as a percentage of its free float has risen to almost 19 percent -- its highest level since 2014, according to Markit data. 

Trying Times
Greenhill's deal backlog may not be enough to prevent it from having its worst year since the crisis. To fund its dividend, it may increase its borrowings.
Source: Bloomberg

I raised the issue of Greenhill's light deal pipeline a little under a year ago, when it became clear that the firm's outsize reliance on Teva Pharmaceutical Industries Ltd. was a liability. Lackluster activity from its clients is a key reason the stock has lagged lately, resulting in a dissipation of its previous price-to-earnings premium over rivals. The firm's top 10 clients were responsible for 40 percent of its revenue in 2016 (and 32 percent in 2015), and there's a danger this figure could climb. Greenhill's recent annual reports have contained this disconcerting disclosure:

We expect that our advisory engagements will continue to be limited to a relatively small number of clients, compared to some of our larger competitors, and that an even smaller number of those clients will account for a high percentage of revenues in any particular year. 

One way to mitigate this risk is to fix its business mix -- the firm has a relatively smaller presence in the arenas of restructuring and middle-market transactions. While management has taken some steps to correct this, like hiring former Barclays banker George Mack as co-head of financing advisory and restructuring in late June, it should remain a priority. Still, as it hires pricey senior bankers for those areas or traditional advisory, Greenhill needs to ensure it stays selective.

Another way to smooth out earnings lulls and peaks is for the New York firm to diversify into an area like equities, a road taken by Evercore Partners Inc. back in 2014 with its ISI purchase. Or, it could attempt to merge with a smaller boutique that's focused on an industry such as energy, mirroring the tie-up between Perella Weinberg Partners and Tudor Pickering.

Beyond that, Greenhill could search for a buyer. Although it would likely be coveted by suitors including Canadian, Australian and Asian banks, management would probably only consider such a drastic move if fee-generation stayed tepid for a prolonged period.

Falling Behind
Greenhill shares have lagged behind those of its independent investment bank rivals and are close to an all-time low.
Source: Bloomberg

Greenhill should also address the dilemma of its fixed dividend, which props up its stock but is perhaps unsustainable. This year, its projected annual outlay of more than $60 million will likely exceed its operating income. CEO Scott Bok said on a recent earnings call that the firm is willing to increase its debt borrowings or move cash back from overseas to maintain that dividend if needed, which seems odd until you consider that there's perhaps another motive at play. 

Sustainable?
As a result of its tanking share price, Greenhill's dividend yield has jumped to almost 11 percent
Source: Bloomberg

According to filings, key executives receive their bonuses not in cash but in the form of performance restricted stock units which include dividends paid on the underlying shares. For Bok, the 2016 amount attached to the dividends alone was almost equal to his $600,000 base salary, leaving some Wall Street analysts such as UBS AG's Brennan Hawken viewing the dividend as an "alternative form of compensation expense." 

Bok is adamant that the dividend policy is simply part of Greenhill's long-term strategy of returning capital to shareholders. But with a cloud over the firm's ability to originate fees in the current environment, it may be time to reconsider that stance and move to a variable dividend stream. Any excess cash or additional debt capacity could go toward a strategic acquisition.

Greenhill bankers have spent decades helping companies decide how to chart their paths. Now, some self-help wouldn't go astray.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Given that fees are generally only paid after a deal closes, in order to have a decent second half Greenhill would need at least some large deals to be announced by now.

  2. In 2016, the firm had 71 managing directors and only 71 clients that paid $1 million or more in fees. Comparatively, Moelis & Co. had 110 managing directors and 167 clients that paid $1 million or more in fees.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net