Ann: Market Update Amendment to Syndicated Facility Agreement, page-218

One of the matters referenced in The Age articles was the loss of the Swinton contract in late July 2015 which, at the time was described as immaterial by SGH.

In announcing its 2015 acquisition, SGH made a lengthy Presentation in which it outline the F16 PSD earnings guidance. This included the very large orange motor representations in terms of both revenue and EBITDA (at slides 24, 25 and 47).


ASX - 27/7/15
SGH announcement to ASX:
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Slater and Gordon Limited (Slater and Gordon) advises that on Friday 24 July 2015, United Kingdom time, the claims management services agreement (Agreement) between Swinton Group Limited (Swinton) and its Professional Services Division (PSD) was ended, with effect from midnight on 31 October 2015. The PSD has been providing first notification of loss services to Swinton, a leading UK insurance broker, and legal and complementary services to not-at-fault Swinton customers since December 2012. The impact of the end of the Agreement is not expected to be material to FY16 earnings, but Slater and Gordon has elected in the current circumstances, to make this announcement nevertheless.


AFR – 27/7/15
AFR commentary on the Swinton contract termination:
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The ASX listed law firm said that the Professional Services Division, which Slater & Gordon acquired in March from Quindell, had been providing a range of services to customers of Swinton including processing claims, legal advice and other complementary services to not-at-fault customers.

Swinton was named as a major client of Quindell's PSD unit and signed a multi-year contract with Quindell in December, on the same day the company disclosed that founder Rob Terry had sold all his shares.

The extended agreement, penned at a time when Quindell's share price was plunging, was for Swinton to exclusively handle motor claims processes, legal services and related services for its 1.2 million policyholders.
The Slater & Gordon announcement is light on detail and the company says its affect will not be material but given the "current circumstances" chose to disclose the agreement termination, which comes into effect in October 2015.
A reason for the termination of the agreement was not given. A Slater & Gordon spokeswoman said the company was bound by a confidentiality agreement.
However, in April 2014 Quindell told shareholders, the Swinton contract was "material to Quindell's revenues and one of the largest signed to date". Swinton is described in Slater & Gordon's investor presentation as one of four insurance clients of PSD's motor services line of business.

Macquarie analysts said the contract loss was clearly a negative but not material. The low margin impact of its motor services business, a £25 million revenue hit would only have an earnings impact of £1 million. The legal services division however also sources cases via the motor services division and may have less access to higher margin cases, although management anticipate the lost cases can be replaced, Macquarie said.

UK based industry sources said the contract with Swintons, a household name, was the legal division's 'jewel in the crown' because it generated high quality legal expense work, rather than cases found through internet leads or databases. Sources added that profit margins on motor services were tight and the business itself wasn't lucrative but a key source of legal work.

Investors who attended Slater & Gordon's recent investor day said the video presentation to investors unveiling its new UK acquisition featured Swinton. The investor day video mentioned more than 15 referral partners, the Slater & Gordon spokeswoman said.


H17 – 27/2/17
SGH admits, for the first time, some of the effects of the Swinton contract loss. This, for example, from its H17 Presentation:
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“Health & Motor fees lower due to loss of Swinton and DLG contracts and Crusader sale. Health revenue lower on reduced intake into Claims.”

Then, there was this:
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“§ EBITDAW declined in both Health and Motor due to the impact of contract losses in Motor and lower referral volumes in Health.”


But, then, there was this from F16 – 28/8/16
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“SGS Health has performed broadly in line with expectations, given lower intake volumes in Claims business. SGS Motor has delivered consistently high levels of service performance to partners and has made steady progress in reducing aged debt levels whilst reliably delivering new client opportunities in PIL cases to Claims. H2 revenue declined due to the loss of Swinton contract noting the immaterial impact on the EBITDAW line.”


And this, from H16 – 29/2/16
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“Motor and Health impacted by lower case intake but contributing positively to earnings.”


In a summary sense
Health and Motor fees had already been tracking down, as the following demonstrates:

	Column 1	Column 2	Column 3	Column 4
0	Health & Motor	H16	2H16	H17
1	Fees	£60.9	£46.4	£38.3
2	EBITDAW (normalised) – everything with SGH has to be normalised)	£7.7	£5.9	£3.7
3	Margin	12.6	12.7	9.7

It has however taken SGH a long time (>18m) in which to basically state that their statements of 27/7/15 were incorrect, as in both the F16 results and in the H17 release, Swinton (the immaterial contract loss) was heavily referenced as being the cause, source, or area of prime responsibility, for SGS’ results being down.

For such an immaterial contract loss (as SGH’s arguments of 27/7/15 originally put it), how can they have subsequently blamed that contract loss for their under-performance in Motor?

All this has culminated in today’s Fairfax report (3/4/17) which states (in part):
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“According to Mr Clarke, Slater and Gordon also allegedly failed to recognised the impacts of regulatory changes in the UK and did not treat the end of the agreement between Swinton and the professional services division of Quindell as an impairment indicator.”

In response to this and the other claims made, SGH countered with the following:
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“A spokeswoman for Slater and Gordon said allegations are denied and will be defended vigorously.”

But, then again, on 30/3/15, in announcing the acquisition to the market, SGH /Grech had the following to say:
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“Mr Grech continued, “……. The proposed acquisition follows an extensive due diligence process by Slater and Gordon and our financial, accounting, tax, legal and commercial advisers. We have undertaken a bottom-up, fundamental assessment of PSD, which together with our firm’s deep UK market experience and track record of successful acquisitions and integrations, underpins our confidence in the transaction”. …… Slater and Gordon is being advised by Citigroup and Greenhill (joint financial advisors), Macfarlanes (UK legal counsel and legal diligence), Arnold Bloch Leibler (Australian legal counsel), and Ernst & Young (accounting and tax diligence).”

So, just who is going to be named in SGH’s defence + cross claims due on 27/4/17 (if any)?