The Slater & Gordon Limited (ASX: SGH) share price is likely to swing wildly again today as speculators, day traders and the few remaining long-term holders of the shares look to react to reports in the Fairfax press that the firm is moving to agree a deal with its lenders.
The Australian Financial Review is today reporting that a debt-for-equity swap is the most likely deal to be reached. It reports "100 per cent of the equity ownership of the business is likely to be transferred to the lenders, which will be enacted by a scheme of arrangement".
If correct this sounds bad news for current shareholders, who have been all but wiped out already and are behind the banks and other secured debt holders in the queue of debt or equity holders looking to salvage their investments in a business still posting cash outflows. This is a major problem as the firm still has fast upcoming interest and debt payments to meet under the terms of its syndicated finance agreement (SFA) with its banking lenders.
Even if existing shareholders were somehow cut into any rescue deal the fact that the issued equity in the business is now only valued at around $35 million means the terms of any debt-for-equity swap are likely to be so dilutory to existing shareholders as to make their scrip almost worthless. This is because any deal with the lenders will likely value the real equity in Slater & Gordon's profitable businesses (which could be say $300 million) in return for writing off the debt.
The law firm now has $737.6 million in bank debt largely as a result of its disastrous $1.2 billion acquisition of UK claims management group Quindell PLC in April 2015. Given Slater & Gordon's financials and the shocking history of Quindell I suggested in April 2016 that a debt-for-equity swap could be the most likely solution for the group if it wanted to continue trading.
If any decisive deal is agreed to write off some of Slater & Gordon's debts and effectively save the firm from going into administration then the future of its chief executive and chairman at the firm is likely to come into doubt.
They are the individuals who pressed ahead with the deal to buy Quindell in April 2015, despite the fact that a simple Google search at the time showed serious problems with the Quindell business.
Before the deal had even been announced to the market I warned on March 15 2015 that: "Quindell has a patchy history having lost around 80% of its market value in the last year after falling victim to one of the most infamous short selling attacks in trading history and losing its CEO amidst an investigation into its accounting practices.
Currently audit firm PWC are due to report on the validity of said accounting practices, including accruals and revenue booking.
Slater & Gordon shareholders may be surprised therefore to hear that management are preparing to launch a blockbuster deal to dwarf all previous acquisitions – for part of a company that still has serious questions hanging over its accounting practices"
Astonishingly, Slater & Gordon still went ahead with the deal announcing it to the market on March 30 2015, before touting it to the analyst community who were almost unanimously supportive of it.
Given this looks the biggest management blunder in Australian corporate history, I can't imagine those responsible for it will be at the firm much longer if the banks and its creditors become its new masters.