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.

Has Greenhill & Co. Inc.'s Scott Bok been reading Gadfly

Some six weeks after I wrote that the flailing boutique advisory firm should consider some self-help, it has bitten the bullet. Late on Monday, the New York-based investment bank revealed a dramatic plan to resuscitate its stock, which has slumped along with its fee pool as is struggled to win new business. Call it a last stand.

Downward Slope
Greenhill has been spurred into action -- but only after it shrunk to a shadow of its former self
Source: Bloomberg

Among the levers that Greenhill is pulling? It's finally agreed to "substantially reduce" or eliminate its unsustainable, fixed dividend. At the same time, its eponymous chairman Bob Greenhill and CEO Bok are each throwing $10 million into the firm, which is also borrowing $300 million. The combined funds will be used to repay debt and repurchase about 30 percent of its shares.

Verdict: Unsustainable
Due to its tanking share price, Greenhill's dividend yield soared to a ridiculous level compared to industry rivals, which is a key reason it's slashing its payout
Source: Bloomberg

The buyback plan may appear generous, but folks shouldn't be fooled. The offer -- at $17 a share, or an 18 percent premium to Greenhill's closing price Monday --is a slap in the face to the majority of investors. For context, the stock's average level since its 2004 initial public offering is roughly $50, so most shareholders that decide to participate will likely face a huge loss.

For those that have been around since the start? Their total return in more than 13 years will be roughly 37.8 percent, assuming a reinvestment of dividends back into Greenhill stock. That's far less than the almost 200 percent return delivered by the benchmark S&P 500 Index.

Greenhill's decision to restructure its capital base should be welcomed by its long-suffering investors, in part because it puts a floor beneath the firm's lackluster earnings per share. 

Rock Bottom
Greenhill's decision to upheave its capital structure should prop up its earnings per share. Still, the prospect of prolonged revenue weakness and a heavy debt load could spell trouble.
Source: Bloomberg

Notably, it involves a heavier debt load, one that represents a grimace-inducing leverage ratio of roughly 9.2 times its projected 2017 Ebitda -- a higher level than the load that caused the demise of junk-rated retailer Toys "R" Us.

Without a meaningful rebound in advisory fees, the new capital structure is no more than a Band-Aid. It's tough to be optimistic. 

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

  1. An important side note: The financing is being led by Goldman Sachs Group Inc., which is the latest sign of success for its lending business -- one area of focus at the bank as it aims to improve its own returns.

  2. Those who didn't reinvest their dividends are facing a better total return of 92.5 percent, but that still pales in comparison to the benchmark S&P 500 Index's roughly 160 percent gain, assuming dividends weren't reinvested.

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