Markets rule on Slater & Gordon’s disastrous acquisition
The more than 90 per cent collapse in Slater & Gordon’s share price since its controversial $1.3 billion acquisition of a UK law firm provided a barometer of the market’s scepticism about the quality of that deal. An $814.2 million write-off of the goodwill associated with the acquisition says emphatically that the market got it right.
When it was unveiled, along with an $890m equity raising to fund it, Slater & Gordon described it as “transformational”. So it has proved to be, but not in a good way.
Indeed, that acquisition of what was then called Quindell (now Slater Gordon Solutions), has forced Slater & Gordon into negotiations with its bankers, which have appointed McGrath Nicol and FTI Consulting as their advisers.
The law firm, which has net bank debt of $741m, has to provide its lenders with an operating plan and a restructure proposal that includes a plan to reduce debt next month. If an agreement on changes to its facility can’t be reached by the end of April, it could have only until March 31 next year before the facility matures and has to be repaid. At the moment, Slater & Gordon says it isn’t in breach of any of its financial covenants.
The impairment against the UK acquisition formed the larger part of $876m of goodwill impairments and was due to both a revision down of the group’s expectations of its future financial performance and foreshadowed changes to UK small claim personal injury laws.
Slater & Gordon’s chief executive, Andrew Grech, has so far survived the fallout from the disastrous acquisition (probably because the group’s position is so precarious) and says that the group’s key priority for this financial year is now reducing debt and re-establishing a sustainable capital structure. The UK business is being restructured and he says the changes will help ensure it is sustainable.
“We remain convinced that the emerging market environment in the UK will make scale at least as important as it has been in Australia in generating sustainable returns,” he said.
Apart from the market’s aggressive questioning of the merits and value of the Quindell acquisition, the firm has been subjected to a protracted review by the Australian Securities and Investments Commission of its accounting treatment of goodwill, the way it recognises fee revenue and therefore the way it values its ‘’work-in-progress’’ and the provisioning for debtors and disbursement assets.
ASIC said today it had now discontinued its inquiries after Slater & Gordon’s announcement of the goodwill write-offs and a reduction in the value of its work-in-progress (WIP) after it adopted a new accounting standard which lowered its previous WIP balances, from the 2014 financial year on, by between 15 per cent and 20 per cent.
The problems within the UK businesses were underscored by their performance pre-impairments. Between them the two business units Slater & Gordon has in the UK incurred first-half losses (at an earnings before interest, tax, depreciation, amortisation and movement in WIP level) of $34.2m, outweighing the $16.4m generated by the Australian business and pushing the group $17.8m into the red on that basis.
Before tax and impairments, it lost $93m compared to a $60m profit for the same half of 2014-15.
The Quindell acquisition has lived up to the market’s worst fears.
It was a listed business that, like Slater & Gordon, had grown aggressively via an acquisition strategy.
There was considerable cynicism about its reported financials and, while Slater & Gordon did try to quarantine the most obviously suspect lines of business from the acquisition, the cynics — and the queues of short-sellers who piled into exposures to Slater & Gordon scrip and drove its price down from $7.70 just short of a year ago to below 60 cents this month — have been proven correct.
In the near term, Slater & Gordon’s future is going to be determined by the discussions with its bankers.
If those are successful, the group will have bought the time to restructure the UK business and put itself on a sounder footing. If they aren’t, it will be scrambling to try to survive.
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