To Grant62 for detailing SGH's conduct of the purchase of PSD.
imvho it summaries the view from SGH as they saw it at the time and was how SGH presented it.
I'm reposting as investors new to SGH may not have the time to familiarise themselves with the history.
Here goes (and thanks to the Blueshare member who compiled and archived this)...
(
abbreviations in the posts below refer to:- CA - Class Action; MB - Maurice Blackburn solicitors undertaking Class Action claim against S&G: EY - Ernst & Young, one of several accountancy firms employed by S&G to advise on the Quindell purchase.)
HotCopper post from Grant62 6 february 2017
Grant62
4,257 posts.
Date: 06/02/17
Time: 18:06:40
Post #: 22406981
jimk3758 said:
↑
(Responding to a post by jimk3758 Grant62 made the following observations about SGHs claims regarding the depth of "due diligence" applied to the purchase)
It could however be said that SGH /AG also positioned the PSD acquisition in such a way as to pass off any blame or failure to its /their advisers. Regardless, one significant hurdle for AG to overcome is with having conducted the most extensive DD ever. Continually repeating such statements in ASX /market announcement releases is likely to cause SGH more than a bit of grief in coming up against the CA. For example:
ASX 30/3/15 (announcing the acquisition + CR):
....
"The proposed acquisition follows an extensive due diligence process by Slater and Gordonand 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)."
ASX 25/6/15 (responding to media reports concenring the Quindell investigation):
....
"Slater and Gordon reiterates that its due diligence investigations in relation to the acquisition of PSD were undertaken with the assistance of EY having regard to the underlying assets of the PSD and Slater and Gordon’s own accounting policies."
ASX 29/6/15 (responding to the ASIC investigation):
....
"The Company reiterates that its evaluation of the fair value of the PSD assets was undertaken with the assistance of EY and the Company’s assessment of the value of those assets was undertaken under the Company’s own accounting policies."
AICD - Company Director - Interview 1/8/15 with John Skippen (commenting on UK acquisition):
....
"JS: When a company is making lots of acquisitions, the board must ensure there are very clear processes and delegation of authority. Slater & Gordon has an excellent acquisitions team and tremendous experience over a long period in acquiring firms. But the board is not constrained in any way in getting independent advice on an acquisition if it chooses to."
"JS: Slater & Gordon first went to the UK in 2012, so we already had a good understanding of that market. PSD was a complex deal, simply due to its size and the nature of its cases. We strongly believe the best people to assess the value of work in progress are the people who do the work each day, so we had more than 70 of our solicitors go through PSD’s files as part of the due-diligence process.We also had Ernst & Young, Greenhill & Co [an independent global investment bank] and CitiGroup advising us. "
"Andrew Grech, Ken Fowlie and Kirsten Morrison [Slater & Gordon’s group general counsel] were in the UK for several months doing due diligence, in addition to the firm’s M&A team. We had at least five board meetings about the PSD deal and I spoke to Andrew every day or two for an update on its progress. It was the most rigorous due diligence I have seen."
"JS: A key difference between the PSD deal and our other acquisitions, apart from its size, was the valuation. Management was prepared to pay a higher multiple for PSD because it meant we were doing the equivalent of 20 to 30 transactions in the UK in one deal. The board had to be convinced about the valuation and after careful consideration it approved the deal."
ASX 6/8/15 (commenting on the release of Quindell's accounts):
....
"Quindell’s accounting policies were not relied on by Slater and Gordon in its due diligence of the PSD, which was undertaken with the assistance of Ernst & Young LLP."
"Slater and Gordon’s assessment of the PSD, including its historical financial performance, was based on a fundamental, bottom-up analysis including the review of 8,000 case files by 70 lawyers.The PSD is now focused on the higher velocity, cash generative fast track road traffic accident segment rather than growth in cash consumptive hearing loss claims."
ASX 28/8/15 (announcing the F15 results):
....
"Successfully completed capital raising and completion of the Professional Services Division transaction (now Slater Gordon Solutions (SGS)) – July performance in line with expectations."
"Slater and Gordon Group Managing Director Andrew Grech said: “We are very pleased with the
financial results we have been able to deliver in FY15. We have put a lot of effort into business
improvement initiatives throughout the year and it is satisfying to see this effort translating into improved client satisfaction, deeper brand awareness and improved financial performance.The underlying operational performance across Australia and the UK is strong and we have again delivered what we promised at both a strategic and operational level. The results are even more pleasing having regard to the intensive acquisition activity and additional scrutiny our team has had to contend with.""
ASX 20/11/15 (Chairman's address to AGM):
....
"The acquisition of SGS was funded through a mix of debt and equity. The equity was raised using a pro rata renounceable rights offer, a decision made in consultation with our advisors Greenhill and Citi."
"We were, and remain, confident that the acquisition would deliver value for shareholders, and therefore wanted to ensure all existing investors had the opportunity to participate if they
desired. As such, we were advised that a pro-rata rights offer was the most equitable structure and most appropriate due to the tight timing constraints of the transaction."
"We also commenced a process to appoint new external auditors for the Group. I am pleased to confirm that following a competitive tender process EY have been appointed to become the Group’s statutory auditors. This appointment is subject to ASIC’s consent to the resignation of Pitcher Partners and we will be seeking ratification by shareholders at the next Annual General Meeting."
"GOVERNANCE:
"In September we announced our intention to expand our board with the appointment of two additional non-executive directors. I am pleased to welcome James Millar to the board and as
the new Chair of the Audit, Compliance and Risk Management Committee commencing on the 1st of December. .... Discussions to secure a second board appointee are underway and will
be announced in due course."
"We also have appointed a new General Counsel and Company Secretary Moana Weir who joins us with 15 years’ experience with ASX listed companies, including as General Counsel at REA and more recently SEEK Ltd."
ASX 20/11/15 MD's address to the AGM:
....
"After 5 months of ownership, we remain convinced of the strategic merit which underpinned our acquisition of the business assets now known as Slater Gordon Solutions (SGS).There is a great deal of activity underway to ensure that we achieve our over-arching goal of securing the leading position in the UK personal legal services market, which is not only a market 4 – 5 times the size of the comparable Australian market but also one consolidating at an accelerated rate. .... Another issue this calendar year has been the errors in our financial accounts. We acknowledge that we have some work to do to restore investor confidence and I hope our shareholders recognise through our various announcements over the past few months, including the recent key appointments indicate that the necessary changes to take the organisation forward successfully are being made."
"FY16 Guidance
On the basis of our trading performance to date, I am delighted to reaffirm the 2016 financial year Group guidance provided in our full year results presentation in August."
ASX 30/11/15 Commenting on possible UK regulatory changes:
....
Impact of Proposed UK Regulatory Changes
Slater and Gordon Limited (“the Company”) reaffirms its 2016 financial year Guidance of A$1,150m Fee Revenue and A$205m EBITDAW.The Company remains in compliance with its obligations to financiers and notes that its debt covenants are not related to market capitalisation.
As reported at the Company’s recent AGM the operating performance of Slater Gordon Solutions (“SGS”) continues to improve with the trading activity of the overall UK business (including SGL) expected to contribute positively to gross operating free cash flow in December underpinning confidence in the Company’s guidance for the 2016 financial year.
ASX 17/12/15 - updating market guidance /withdrawing F16 guidance:
.....
2016 Financial Year Update
Slater and Gordon Limited (“the Company”) confirms that Slater and Gordon Lawyers (Australia) and Slater Gordon Solutions (SGS), excluding noise induced hearing loss (NIHL), are continuing to trade in line with expectations. However, lower than expected trading results in segments of the business in the UK in November, coupled with the commencement of a review of the Company’s approach to financial forecasting by new Group Chief Financial Officer Bryce Houghton and independent advisors appointed by the Board, has resulted in 2016 financial year guidance being reconsidered.
Whilst the Company expects that the UK business will make a positive contribution to gross operating cash flow in December, cash timing differences and a poorer than expected case resolution profile will impact negatively on the gross operating cash flow result for the 6 months ending 31 December 2015. An update on the impact on the gross operating cash flow result for that period will be provided in January 2016.
As a result of the above, there is a significant risk that full year guidance will not be met and accordingly the Company withdraws its previous full year guidance pending the outcome of the review referred to above. The Company expects to update the market at the time of its half year results presentation.
ENDS
--------------------------
Further and regarding the role of accountants Ernst & Young Grant62 commented in an earlier post
The repeated crossover references to EY etc suggests that (even during the mid to back end of 2015), SGH was positioning itself so that, if challenged, it could then start blaming its external advisers for what happened. But then, along came the AICD interview which Skippen freely gave and which put SGH's own team of experts, lawyers and management right at centre court. Since then, little has changed, but by way of implication, etc, if eventual blame is directed at EY, then so too blame must equally be metered out to JS and to AG.
But beyond all this, the key killer statement in all the releases made over time was the one from 6/8/15 where the following was said:
"Quindell’s accounting policies were not relied on by Slater and Gordon in its due diligence of the PSD, which was undertaken with the assistance of Ernst & Young LLP."
Just days prior to this being advised, JS had informed The Director (AICD's monthly magazine), in an interview, that "It was the most rigorous due diligence I have seen."
Going forward, in order to ward off MB, SGH will likely be wishing that it had not said anywhere near as much as what it had said in its various ASX releases. But, having already had Pitcher Partners fall on its sword, SGH then proceeded to appoint EY as its replacement auditors. The very same people who had earlier strategically advised on all aspects of the PSD acquisition. So, even there, SGH had no doubts at all about EY meaning that any change of mind now would simply be an exercise in brazen self preservation and friendly cannibalization. Sometimes, the more that is said (even in the hope of being transparent) can make the subject somewhat worse off.
For MB, this will be no walk in the park but, if CA activity and behaviour is anything to go by, it will certainly not be easy for either JS or AG who throughout were often seen in the forefront whilst KF increasingly receded to the back office with less pronounced public engagement.
So, whilst SGH may very well seek to sue WTG going forward, WTG will (for the many of the same reasons as MB) undoubtedly focus on the many and varied public, formal and statutory disclosures of SGH, it executive management team, the Board and its Chairman and MD. And virtually all of this (if engaged in) will be carried out under intense public scrutiny, not just by the media, but by the banks, the shareholders, by employees and clients, as well as by competitors and regulators. 2017 therefore may very well be among the most interesting and engaging of times in SGH's listed life, not because it yearns for such attention but because this is how the planets seem to be aligning.
The upcoming H17 results will therefore be crucial to how SGH attempts (ie: starts) to take back control of its destiny, whilst reinforcing its flanks and shoring up its behind. Today's media story therefore was needed like a festering sore, but sometimes when the rod is already drawn, it attracts every crack of lightning there is. In another time, and in another place, it could well have been SGH who were pushing today's story. Hence the rod and that crack of lightning. Not just interesting times, but challenging times still to be had.
ENDS
--------------------------
Later in the month on 17 february he posted further thoughts:
HotCopper post from Grant62 17 february 2017 @ 11:42
I've got several problems with the argument, the main one being because of the following comment made by Skippen in Aug15 (The Director interview):
....
JS: A key difference between the PSD deal and our other acquisitions, apart from its size, was the valuation. Management was prepared to pay a higher multiple for PSD because it meant we were doing the equivalent of 20 to 30 transactions in the UK in one deal. The board had to be convinced about the valuation and after careful consideration it approved the deal.
Another concerns the following added comment (also, from The Director interview):
....
JS: Slater & Gordon first went to the UK in 2012, so we already had a good understanding of that market. PSD was a complex deal, simply due to its size and the nature of its cases. We strongly believe the best people to assess the value of work in progress are the people who do the work each day, so we had more than 70 of our solicitors go through PSD’s files as part of the due-diligence process. We also had Ernst & Young, Greenhill & Co [an independent global investment bank] and CitiGroup advising us. Andrew Grech, Ken Fowlie and Kirsten Morrison [Slater & Gordon’s group general counsel] were in the UK for several months doing due diligence, in addition to the firm’s M&A team. We had at least five board meetings about the PSD deal and I spoke to Andrew every day or two for an update on its progress. It was the most rigorous due diligence I have seen.
---------------
Put together, these comments are damning, because in one sense, Skippen was saying that it didn't matter what amount was paid for PSD so long as it stacked up against them quickly amassing scale. So, in a way, if someone is willing to pay a greater price /multiple than what the asset is genuinely worth, then that's the buyer's problem, not the seller's.
Equally, the due diligence exercise, as rigorous as what they have repeatedly said, keeps on pointing to them being at fault, not Watchstone.
I don't say this lightly but there comes a time when repeated boasting about what you (ie: SGH) have done and achieved) may well come back and bite them on the proverbial. The trouble here was that they were in a mad rush to get scale and were prepared to sacrifice price and value in order for this to be achieved. They then tried to counter this by saying that they had undertaken the most rigorous DD ever. So, which was it? Greed + great DD = overpaid. Or greed + fake news DD = overpaid and sloppy. Either way, this doesn't bode well for SGH vis-a-vis their CA with MB.
As for Watchstone, the real argument here is whether Watchstone, in any way, managed to pool the wool over SGH's collective eyes. That is, steered them away from looking into things too closely. If so, then if the material problems relate to information that Watchstone provided or put together, then it's a potential problem for Watchstone. But if, as Skippen's comments tend to have reinforced, time and again, it was all as a result of SGH's own interpretation of the information that they were provided with, examined, or tested, then unfortunately it is much more of an SGH, rather than, a Watchstone, problem.
That said, the PSD acquisition did have an inherent, underlying value, so if this ends up being written down in its entirety, then the question will undoubtedly arise as to how this could have become so. In this regard, much more of the fault would likely stem SGH's way (ie: given Skippen's repeated comments, etc), but some proportional share would also likely filter through from Watchstone (accountability wise).
So, any further impairment will undoubtedly aid the MB CA whilst it may only proportionately benefit SGH vis-a-vis the Watchstone claims.
In a way, Skippen (who still remains as chairman) has fully inverted to become his own worst enemy, as indeed have SGH's external advisers who (then, as now) form part of the SGH fabric - Ernst & Young, ABL /Arnold Bloch Leibler, Greenhill and CITI.
So:
* MB CA - reinforcing of their claim;
* Watchstone claim - maybe provided that get over the boasting hurdle as to being prepared to paid over the odds, and having conducted the best ever DD;
* PSD DD advisers - emerging.
imvho SGH appear to have sealed it's fate as after reviewing the announcements the claim appears reckless to me.
I hold WTG (and currently less SGH now than is economic to trade)
