- Reversal of previously recorded unrealized merchant banking gains
due to mark-to-market adjustment, leading to a quarterly loss NEW
YORK, Oct. 24 /PRNewswire-FirstCall/ -- Greenhill & Co., Inc.
(NYSE: GHL) today reported a net loss of $11.7 million, or $0.42
per diluted share, for the quarter ended September 30, 2008. The
net loss resulted from the recording of negative ($51.9) million in
merchant banking revenue related to the reversal of unrealized
profit overrides recorded in the second quarter of 2008 and
mark-to-market adjustments in the carrying value of our investment
in our merchant banking funds. The Firm's third quarter 2008
results compare with net income of $35.3 million, or $1.25 per
diluted share, in the third quarter of 2007. On a year-to-date
basis, net income was $36.4 million through September 30, 2008,
compared to net income of $86.8 million for the comparable period
in 2007, which represents a decrease of 58%. Diluted earnings per
share for the nine months ended September 30, 2008 were $1.30,
which compares to $3.00 for the same period in 2007, representing a
decrease of $1.70 per share or 57%. Due to the reversal of the
profit override and mark-to-market investment adjustments the
Firm's third quarter revenues were negative ($14.9) million as
compared with revenues of $119.4 million for the third quarter of
2007. On a year-to-date basis, revenues through September 30, 2008
were $169.1 million, compared to $303.4 million for the comparable
period in 2007, representing a decrease of $134.3 million or 44%.
The Firm's quarterly revenues and net income can fluctuate
materially depending on the number and size of completed
transactions on which it advised, the number and size of merchant
banking gains (or losses) and other factors. Accordingly, the
revenues and net income in any particular quarter may not be
indicative of future results. "Our third quarter results are a
function of two factors related to the current volatility in
markets. First, the substantial second quarter unrealized gains in
energy companies in our merchant banking portfolio were reversed in
the third quarter, as a result of the fact that valuations of
energy stocks generally rose sharply to a peak around the end of
the second quarter before deeply declining during the third
quarter. Second, we had fewer major transactions than are typical
that completed during the quarter in our advisory business. Despite
these two factors, we remain highly confident in both of our
businesses. In merchant banking, we have a strong track record,
with our funds having produced $234 million of merchant banking
revenue to the Firm since our 2004 initial public offering and our
assets under management having tripled in that time. We remain
satisfied with the performance of our current portfolios in a very
difficult environment, with even the energy investments where we
suffered unrealized mark-to-market losses this quarter having
continued to perform well operationally. Likewise in our advisory
business, we remain highly confident in our business model despite
the recent market turmoil having led to the deferral or termination
of certain advisory assignments. Near term, we have been publicly
disclosed as advisor on a substantial number of announced, pending
transactions, some of which are very large. And we also have a
substantial list of undisclosed assignments, particularly relating
to potential strategic transactions among major corporations and
transactions relating to financial distress. Medium term, we expect
to benefit both from an increase in transactions related to
financial distress and from competitive advantages relating to the
extraordinary challenges faced by our larger competitors. Our
historic competitor group has consolidated into fewer, larger
banking-focused entities, which should create an increasing number
of conflicts of interest that create further opportunities for an
independent firm like Greenhill," Robert F. Greenhill, Chairman,
said. "While we are not unscathed by the current market turmoil, we
remain significantly profitable for the year, while many of our
peers have significant losses or larger profit declines. Our
compensation costs remain consistent with our disciplined historic
practice, while many of our peers have substantially increased
compensation ratios to the detriment of shareholders. Most
important, while our major peers are focused on balance sheet
concerns and substantially reducing staff, we have continued to
build our business throughout the current downturn based on our
view that the current environment offers a unique opportunity to
recruit senior banking talent from distressed peers on a
cost-effective basis. Year-to-date, we have announced the
recruitment of eleven Managing Directors, increasing our Managing
Director count by 31%. This group of experienced bankers brings us
sector expertise in Health Care Devices, Health Care Services,
Industrials, Paper & Forest Products and Telecom; new offices
in San Francisco and Tokyo; and a new Fund Placement Advisory
business. We believe that the competitive environment has shifted
substantially in favor of independent advisory firms, and we are
building a significantly broader Firm, with greater geographic and
industry sector capabilities, to take full advantage of that,"
Scott L. Bok and Simon A. Borrows, Co-Chief Executive Officers,
added. Revenues Revenues By Source The following provides a
breakdown of total revenues by source for the three month and nine
month periods ended September 30, 2008 and 2007, respectively: For
the Three Months Ended September 30, 2008 September 30, 2007
------------------ ------------------ Amount % of Total Amount % of
Total ------ ---------- ------ ---------- (in millions, unaudited)
Advisory fees $37.0 NM $116.5 98% Merchant banking & other
revenue (51.9) NM 2.9 2% ------ -- --- -- Total revenues $(14.9)
100% $119.4 100% For the Nine Months Ended September 30, 2008
September 30, 2007 ------------------ ------------------ Amount %
of Total Amount % of Total ------ ---------- ------ ---------- (in
millions, unaudited) Advisory fees $156.3 92% $279.7 92% Merchant
banking & other revenue 12.8 8% 23.7 8% ---- -- ---- -- Total
revenues $169.1 100% $303.4 100% Advisory Revenues Advisory
revenues were $37.0 million in the third quarter of 2008 compared
to $116.5 million in the third quarter of 2007, which represents a
decrease of 68%. For the nine months ended September 30, 2008,
advisory revenues were $156.3 million compared to $279.7 million
for the comparable period in 2007, representing a decrease of 44%.
Completed assignments in the third quarter of 2008 included: -- the
sale of the Akzo Nobel NV's Crown Paints business in the United
Kingdom and Ireland to Endless LLP; -- the sale of the Akzo Nobel
NV's selected Belgian paints brands to Rieu Investissements S.A.;
-- the acquisition by Capvis General Partner III Ltd of the BARTEC
Group from Allianz Capital Partners; -- the sale of Energy East
Corporation to Iberdrola SA; -- the acquisition by Greenfield
Partners of Clayton Holdings; and -- the sale of the Philadelphia
Stock Exchange, Inc. to the NASDAQ Stock Market, Inc. The decrease
in our advisory fees in the third quarter of 2008 as compared to
the same period in 2007 was due to fewer completed assignments that
were significantly smaller in scale. The Firm announced in the
third quarter the recruitment of James Flicker (former head of the
Paper & Forest Products investment banking group at Citigroup)
as a Managing Director in the New York office and Richard Jacobsen
(former Head of the U.S. Health Care Services Group at Citigroup)
as a Managing Director in our San Francisco office. The Firm also
announced the recruitment of Christopher Cooke (former Managing
Director at Lehman Brothers), as a Managing Director based in
London to join our newly formed Fund Placement Advisory Group,
which will be expanded to the European markets. In October the Firm
announced plans to expand its operations to Japan and has opened a
Tokyo office to advise Japanese companies on domestic and
cross-border merger, acquisition and restructuring opportunities.
Kensuke Hotta (former Chairman of Morgan Stanley Japan) has joined
the Firm as Chairman of Greenhill Japan. Hiroto Yamada (former head
of Merrill Lynch Japan's M&A Group) will join Greenhill in
January 2009 as a Managing Director of Greenhill Japan. Merchant
Banking & Other Revenue The following table sets forth
additional information relating to our merchant banking and other
income: For the Three Months For the Nine Months
-------------------- ------------------- Ended Sept. 30, Ended
Sept. 30, --------------- --------------- 2008 2007 2008 2007 ----
---- ---- ---- (in millions, unaudited) Management fees $5.1 $4.6
$14.7 $12.7 Net realized and unrealized gains (losses)on
investments in merchant banking funds (21.8) (2.3) (2.5) 3.3 Net
realized and unrealized merchant banking profit overrides (35.5)
(0.9) (.9) 1.6 Other realized and unrealized investment income
(loss) (0.5) 0.4 (1.8) 2.2 Interest income 0.8 1.1 3.3 3.9 --- ---
--- --- Merchant banking & other revenue $(51.9) $2.9 $12.8
$23.7 --------- -------- -------- -------- The Firm recorded
negative ($51.9) million in merchant banking and other revenue in
the third quarter of 2008 compared to revenues of $2.9 million in
the third quarter of 2007. This decrease was primarily attributable
to the reversal of unrealized merchant banking gains and related
accrued profit overrides recorded in the second quarter of 2008. We
value our merchant banking investments at their fair value at the
end of each quarter. During the second quarter we reported
substantial unrealized gains in merchant banking investment
portfolio principally due to mark-to-market gains in two public
energy companies. During the third quarter the market value of
these energy companies declined significantly, resulting in a
reversal of the profit override and previously recognized
unrealized gains. In total, during the third quarter of 2008 our
merchant banking funds (and the Firm) recognized gains from two (2)
of our portfolio companies and recorded losses on eight (8) of our
portfolio companies. For the first nine months of 2008, the Firm
earned $12.8 million in merchant banking and other revenue compared
to $23.7 million in the first nine months of 2007, a decrease of
46%. This decrease was attributable to a decline in the market
value of our merchant banking portfolio and the write off of a
principal investment. On a year-to-date basis our merchant banking
funds (and the Firm) recognized gains from eleven (11) of our
portfolio companies and recorded losses on twelve (12) of our
portfolio companies. At September 30, 2008, the Firm had principal
investments of $103.5 million, nearly all of which either were
through investments in our four merchant banking funds or GHL
Acquisition Corp. (AMEX:GHQ), our special purpose acquisition
company. Of that amount, 32% of our investments related to the
energy sector, 31% to the financial services sector and 37% to
other industry sectors. We held 96% of our total principal
investments in North American companies, with the remainder in
European companies. Our investments in companies that have become
publicly traded after we first invested in them represented 35% of
our total investments. In terms of new investment activity during
the third quarter of 2008, our funds invested $114.6 million, 11%
of which was Firm capital. In the same period in 2007, our funds
invested $26.4 million, 19% of which was Firm capital. In the third
quarter, we announced that we had agreed to invest $22.9 million in
Iridium Holdings, LLC, a leading provider of voice and data mobile
satellite services ("MSS"). GHL Acquisition Corp., an affiliate of
the Firm, announced at the same that it had agreed to acquire
Iridium in a transaction that values Iridium at an enterprise value
of approximately $591 million, subject to stockholder approval,
various regulatory approvals and other customary closing
conditions. If the acquisition of Iridium is completed on the
agreed terms, the Firm will own approximately 6.9 million common
shares of the combined company (AMEX:GHQ) and 6 million warrants
(AMEX:GHQ/WS), in addition to our investment of $22.9 million
referred to above. "The Firm manages three funds with substantial
capital available to invest. While we are satisfied with the
performance of our portfolios in a very difficult economic and
market environment, we also believe there will be very attractive
opportunities for deploying the remaining capital in our funds,"
Robert H. Niehaus, Chairman of Greenhill Capital Partners,
commented. Expenses Operating Expenses Our total operating expenses
for the third quarter of 2008 were $4.0 million, which compares to
$65.1 million of total operating expenses for the third quarter of
2007. This decrease related to a reduction in the amount of accrued
compensation due to the negative revenue reported in the quarter
and is more fully described below. For the nine months ended
September 30, 2008, total operating expenses were $111.0 million,
which compares to total operating expenses of $169.5 million for
the comparable period in 2007. The decrease of $58.5 million or 35%
relates principally to the decrease in compensation expense offset
by slightly increased non-compensation expense and is described in
more detail below. The pre-tax income margin for the nine months
ended September 30, 2008 was 35% compared to 44% for the comparable
period in 2007. The following table sets forth information relating
to our operating expenses, which are reported net of
reimbursements: For the Three Months For the Nine Months Ended
September 30, Ended September 30, -------------------
------------------- 2008 2007 2008 2007 ---- ---- ---- ---- (in
millions, unaudited) Employee compensation & benefits expense
$(6.6) $54.9 $77.9 $139.6 % of revenues NM 46% 46% 46%
Non-compensation expense 10.6 10.2 33.1 29.9 % of revenues NM 9%
20% 10% Total operating expense 4.0 65.1 111.1 169.5 % of revenues
NM 55% 66% 56% Minority interest in net income of affiliates (0.5)
(0.1) (0.2) 0.0 Total income (loss) before tax (18.4) 54.3 58.3
133.9 Pre-tax income margin NM 46% 35% 44% "It is our goal to
maintain a compensation ratio that is consistent with historical
practice and continue to demonstrate discipline in our control of
non-compensation expenses," Richard J. Lieb, Chief Financial
Officer, commented. Compensation and Benefits Expenses In the third
quarter of 2008 we reversed a portion of the annual bonus accrual
recorded previously in the year consistent with the negative
revenue reported for the quarter. Accordingly, compensation and
benefits expenses in the third quarter of 2008 were negative ($6.6)
million as compared to $54.9 million for the third quarter of 2007.
For the nine months ended September 30, 2008 and 2007, the ratio of
compensation to revenues remained constant at 46%. Employee
compensation and benefits expense for the nine months ended
September 30, 2008 amounted to $77.9 million, which compares to
$139.6 million for the nine months ended September 30, 2007 and
reflected a 46% ratio of compensation to revenues. The decrease of
$61.7 million or 44% is due to the lower level of revenues during
2008 as compared to the same period in the prior year. Our
compensation expense is generally based upon revenue and can
fluctuate materially in any particular quarter depending upon the
amount of revenue recognized as well as other factors. Accordingly,
the amount of compensation expense recognized in any particular
quarter may not be indicative of compensation expense in a future
period. Non-Compensation Expenses Our non-compensation expenses
were $10.6 million in the third quarter of 2008, which compared to
$10.2 million in the third quarter of 2007, representing an
increase of 4%. The increase is principally related to greater
travel and costs primarily attributable to the growth in personnel
and new business activities. For the first nine months of 2008, our
non-compensation expenses were $33.1 million, which compared to
$29.9 million in the first nine months of 2007, representing an
increase of 11%. The increase is principally related to greater
travel and information service costs primarily attributable to the
growth in personnel, higher occupancy and other costs associated
with new office space in London and Frankfurt offices and an
increase in interest expense related to greater average short term
borrowings during the first nine months of 2008 as compared to the
same period in 2007. Non-compensation expenses as a percentage of
revenues in the nine months ended September 30, 2008 were 20%
compared to 10% for the same period in the prior year. This
increase in non-compensation expenses as a percentage of revenue in
the nine months ended September 30, 2008 as compared to the same
period in the prior year reflects slightly higher expenses spread
over significantly lower revenues. The Firm's non-compensation
expenses as a percentage of revenue can vary as a result of a
variety of factors including fluctuation in revenue amounts, the
amount of recruiting and business development activity, the amount
of reimbursement of engagement-related expenses by clients, the
amount of short term borrowings, interest rate and currency
movements and other factors. Accordingly, the non-compensation
expenses as a percentage of revenue in any particular period may
not be indicative of the non-compensation expenses as a percentage
of revenue in future periods. Provision for Income Taxes For the
three months ended September 30, 2008 we recognized an income tax
benefit of $6.7 million. This reduction in income tax expense
reflected a reversal of taxes provided in prior quarters at an
effective rate of approximately 36%. In the third quarter of 2007
we recorded a provision for taxes of $19.0 million, which reflected
an effective income tax rate of approximately 35%. For the nine
months ended September 30, 2008, the provision for taxes was $21.9
million, which reflects an effective tax rate of approximately 38%.
This compares to a provision for taxes for the nine months ended
September 30, 2007 of $47.2 million, which reflects an effective
tax rate of approximately 35% for the period. The increase in the
effective tax rate in 2008 as compared to 2007 related to a greater
proportion of our pre-tax income being earned in higher tax rate
jurisdictions during the period. The effective tax rate can
fluctuate as a result of variations in the relative amounts of
advisory and merchant banking income earned in the tax
jurisdictions in which the Firm operates and invests. Accordingly,
the effective tax rate in any particular quarter may not be
indicative of the effective tax rate in future periods. Liquidity
and Capital Resources As of September 30, 2008, our cash and short
term investment securities totaled $70.3 million, our investments
totaled $103.5 million and we had $81.2 million in short term debt.
In addition to our investment of $22.9 million in Iridium Holdings,
LLC referred to above, we had total commitments (not reflected on
our balance sheet) relating to future investments in our merchant
banking activities, of $58.9 million as of September 30, 2008.
These commitments are expected to be drawn on from time to time
over a period of up to five years from the relevant commitment
dates of each fund. Dividend The Board of Directors of Greenhill
& Co., Inc. has declared a dividend of $0.45 per share to be
paid on December 17, 2008 to common stockholders of record on
December 3, 2008. Greenhill & Co., Inc. is a leading
independent investment bank that provides financial advice on
significant mergers, acquisitions and restructurings; assists
private funds in raising capital from investors; and manages
merchant banking funds. It acts for clients located throughout the
world from its offices in New York, London, Frankfurt, Toronto,
Tokyo, Dallas and San Francisco. Cautionary Note Regarding
Forward-Looking Statements The preceding discussion should be read
in conjunction with our condensed consolidated financial statements
and the related notes that appear below. We have made statements in
this discussion that are forward-looking statements. In some cases,
you can identify these statements by forward-looking words such as
"may", "might", "will", "should", "expect", "plan", "anticipate",
"believe", "estimate", "predict", "potential" or "continue", the
negative of these terms and other comparable terminology. These
forward-looking statements, which are subject to risks,
uncertainties and assumptions about us, may include projections of
our future financial performance, based on our growth strategies
and anticipated trends in our business. These statements are only
predictions based on our current expectations and projections about
future events. There are important factors that could cause our
actual results, level of activity, performance or achievements to
differ materially from the results, level of activity, performance
or achievements expressed or implied by the forward-looking
statements. These factors include, but are not limited to, those
discussed in our Report on Form 10-K under the caption "Risk
Factors". Greenhill & Co., Inc. and Subsidiaries Condensed
Consolidated Statements of Operations (Unaudited) For the Three
Months Ended For the Nine Months Ended September 30, September 30,
-------------------------- ------------------------- 2008 2007 2008
2007 ---- ---- ---- ---- Revenues Advisory fees $37,004,234
$116,457,989 $156,346,539 $279,704,869 Merchant banking revenue
(52,784,104) 1,753,447 9,475,352 19,809,972 Interest income 842,371
1,141,797 3,290,670 3,910,168 ------- --------- --------- ---------
Total revenues (14,937,499) 119,353,233 169,112,561 303,425,009
Expenses Employee compensation and benefits (6,645,647) 54,947,307
77,867,522 139,563,036 Occupancy and equipment rental 2,548,104
2,595,479 7,934,040 7,082,509 Depreciation and amortization
1,174,515 1,059,673 3,426,871 3,097,971 Information services
1,465,913 1,384,237 4,524,917 3,947,424 Professional fees 959,870
1,097,623 3,171,844 2,982,554 Travel related expenses 2,006,562
1,247,777 5,605,677 4,990,595 Interest expense 858,149 834,664
2,925,490 2,081,156 Other operating expenses 1,582,924 1,952,826
5,490,851 5,751,867 --------- --------- --------- --------- Total
expenses 3,950,390 65,119,586 110,947,212 169,497,112 Income (loss)
before tax and minority interest (18,887,889) 54,233,647 58,165,349
133,927,897 Minority interest in net income (loss) of affiliates
(490,443) (97,433) (164,667) 27,104 --------- -------- ---------
------ Income (loss) before tax (18,397,446) 54,331,080 58,330,016
133,900,793 Provision (benefit) for taxes (6,708,991) 19,028,934
21,887,838 47,150,536 ----------- ---------- ---------- ----------
Net income (loss) $(11,688,455) $35,302,146 $36,442,178 $86,750,257
============= =========== =========== =========== Average common
shares outstanding: Basic 27,893,391 28,069,522 27,944,588
28,847,401 Diluted 27,893,391 28,153,820 28,001,482 28,951,101
Earnings (loss) per share: Basic $(0.42) $1.26 $1.30 $3.01 Diluted
$(0.42) $1.25 $1.30 $3.00 Dividends declared and paid per common
share $0.45 $0.38 $1.35 $0.88 Contact: Richard J. Lieb, Chief
Financial Officer Greenhill & Co., Inc. (212) 389-1800
DATASOURCE: Greenhill & Co., Inc. CONTACT: Richard J. Lieb,
Chief Financial Officer, Greenhill & Co., Inc., +212-389-1800
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