Slater & Gordon Limited announces progress toward giant acquisition

Slater & Gordon Limited (ASX:SGH) has almost finalised its monstrous UK acquisition.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Entrepreneurial law firm Slater & Gordon Limited (ASX: SGH) this morning announced it has received final approval from the UK regulator the Financial Conduct Authority for its purchase of Quindell's professional services division (PSD).

The initial $1.2 billion transaction is due to complete shortly and its merits have split investors with some in favour and some against. What's not up for debate is the transformative nature of the acquisition whether that be good or bad. So it's worth considering some arguments for and against.

For 

  • The business has a strong track record of executing and integrating acquisitions in the UK
  • In the high volume / low margin world of personal injury law greater scale is an advantage
  • The business fits nicely into Slater & Gordon's business model of employing brand power to win market share
  • Quindell's PSD is reported to have some impressive claims management processing technology that Slater & Gordon may eventually harness across its other businesses
  • The opening up of new revenue streams provides diversification
  • The fast-track personal injury segment is reported to be highly cash generative
  • Slater & Gordon is reported to be keeping the Quindell business separate to focus on efficiently handling cash generative low-level cases

Against

  • At 6.9x earnings it appears Slater & Gordon paid a full price for part of a Quindell business that was struggling badly in the UK and in need of a deal
  • Slater & Gordon's piecemeal approach to growing in the UK appeared to be working and this acquisition and the additional debt it brings represent a big move up the risk curve
  • The purchase will also place renewed strain on Slater & Gordon's cash flow and accounting practices, including revenue recognition policies
  • The purchase will destract management from other core businesses in Australia and the UK

Only time will tell if the Quindell purchase was a masterstroke or irrational folly, and the market remains unconvinced by the deal with the stock now trading at a moderate discount to the theoretical ex-rights and offer price for the capital raising required to fund it.

Although high up the risk curve it could be considered a speculative buy for those prepared to give management the benefit of the doubt over its latest acquisition. However, it's probably prudent to watch this business from the sidelines for now.

Other law firms investors could consider include litigation funder IMF Bentham Ltd (ASX: IMF) or rival personal injury operator Shine Corporate Ltd (ASX: SHJ). But I reckon there's much better businesses for investors to eye up if they have some spare cash…

Motley Fool contributor Tom Richardson owns shares of Slater & Gordon Limited. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »