Tentative signs of rocket firing, page-302

I find it interesting to divide the paid $1.3m for Quindell into its two components.

If it was pure equity funded then perhaps the company would have a degree of persuasion (wing & prayer) for institutions and sophisticated plus SPP to fund that asking price. Something along the lines of once-in-a-lifetime opportunity to grasp the UK market in one hit. It is an early adoption of the next growth phase for S&G - are you in? Its a three year plus journey.

However, it wasn't all equity funded as we know. Therefore lenders, which are more sensitive to immediate and sustainable cash flows, were prepared to put up $375m (and more since - the likely need for more must have been known at the time of purchase as it was in the total debt facility).

The million dollar question is, if it was over-priced why did the lending syndicate participate? It seems highly improbable the lenders don't have rigorous criteria to vet what is effectively a loan application.

I doubt any of us really have an answer for this. It is just a quandary when trying to figure out the reasoning for paying the price they did. A price that by definition must have been approved by the lending syndicate.

The only official explanation I have read/heard is that SGH board felt it was a one-off opportunity to acquire all the networks/infrastructure they would need to become a dominant player in their field in the UK - at a price less than if chose to build over time with ad-hoc bolt-ons. If a deal could not be struck at that time there was a real possibility of the value diminishing as the PSD networks started to collapse due to neglect and key clients, partners, staff leaving PSD. A now or never situation.

Fast forward to today and people on HC plus other media and blog writers talk of PSD always being a basket case, never made money, never likely to make money etc etc. In addition some even suggest something less serious also applies to mainstream S&G?

Question - why were leading Australian banks willing to loan money to fund the purchase of a basket case by a company (S&G) that some suggest was weak as a standalone business built on ever increasing WIP with inadequate cashflow.

My view is all is not what it seems, it remains a timing issue. I do not accept that not one but numerous (syndicate) senior institutions failed to notice the red flags if indeed red flags were present leading up to purchase.

The primary reason for impairment was market value did not support book value (plus acknowledge reforms 20 odd % of impact) - market cap to book it was too far out of whack. Therefore the value in use calculation to derive future cash flows could not be to massively out of alignment with what the market is willing to pay 'market cap'. It is the tail leading the dog. Market value says the company is worth XX, yet book value was many multiples of that due to goodwill (translated as expected future cashflows from acquisitions).

So BH and the board had no choice but to bring the two into alignment, or a much closer alignment.

The disturbing fact is any company can have its market cap destroyed if there is a strong will to do so. That becomes particularly relevant when a company has a very large amount of goodwill on its books and its gearing is close to high level.

Net result, destroy the SP, that causes domino effect where goodwill must be tested bearing in mind current market cap and subsequently massive impairment which in turn wrecks metrics and forces debt stress.

The company 'operationally' is sound by all accounts. Even the report McGrath Nicol report suggested something like a sound underlying business. Yes integration issues, not uncommon on such a large integration relative to its industry.

All of this begs a question. Is there (was there) some outside force using networks, favours, etc. at play, putting the company in the position it is in and if so why?

I have a feeling someone, somewhere has a master plan and that plan might soon move into its next phase.

Imagine buying S&G as it was in 2007 for a $1 but now able to buy it plus its UK operations for 30c. The perfect opportunity provided by high gearing and high relative goodwill (numerous acquisitions) to get it to a price that like.

I can forseee some funds building positions very soon, perhaps some of them party to the master plan.