Australia's largest listed firm Slater & Gordon Limited (ASX: SGH) is reportedly moving closer to a huge £640 million ($1.2 billion) acquisition of the legal services division of UK AIM-listed professional services group Quindell PLC.
Big numbers
The eye-watering sum of £640 million (plus future payments related to other PI cases) is being touted by none other than Quindell Plc itself in an overnight announcement to the London Stock Exchange, which stated the amount was among a "number of deal structures" being discussed with Slater & Gordon.
This deal structure has also been reported by London's The Sunday Times Newspaper, which also suggested to expect an announcement over the deal by March 23, when Slater & Gordon's exclusivity agreement runs out.
Is it the real deal?
Slater & Gordon has yet to make an announcement to the market over any details on the deal other than to confirm it is in negotiations and that a deal may or may not happen. However, given that Quindell itself has released this amount (among other deal structures) to the market some credence has to be given to it.
Although, Slater & Gordon has never hinted at a deal size and given its past track record of acquiring UK law firms on multiples of around 1x annual revenues, the £640 million sum would appear out of kilter. It's worth noting that recently The Financial Times reported Quindell's legal services division's half year revenues at £180 million. That amount doubled would be far short of £640 million, but is still a significant amount for Slater & Gordon to cough up.
Moreover, 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.
Furthermore, Quindell's unusual negotiating strategy of announcing the deal's potential details to the market is unlikely to impress Slater & Gordon, and instructive as to its troubled past in falling victim to market rumour and gossip.
The UK company's lowly share price has made double-digit gains on every positive deal-related announcement to the market and there have also been leaks from unconfirmed sources to business journalists over the deal's alleged details.
So what's the big attraction of Quindell's legal services division?
Slater & Gordon's CEO Andrew Grech has hinted recently that it's the chance to develop new business channels in personal injury (PI) law that is attractive about the Quindell acquisition. The lucrative new business channels targeted are those direct to insurers rather than just consumers.
Quindell's legal services division currently provides solicitors and barristers to popular UK insurers to negotiate claim quantums or defend liability on claims received, primarily involving road traffic accidents. Currently Slater & Gordon undertakes a lot of its fee-earning PI work on the other side of the ledger representing the claimants in cases.
How would Slater & Gordon pay for it?
If Slater & Gordon were to bid an amount even halfway close to the $1.2 billion being mooted, it's going to need raise a lot of cash.
Deal-funding options would include cash, debt and an equity raising with all three firmly on the agenda given the potential deal size and a mix more than likely. Slater & Gordon would have the option to borrow in the UK where debt is cheap and existing cash reserves could contribute some part.
However, a capital raising would likely contribute the lion's share, with a placement alongside a share purchase plan for retail holders, or a substantial (renounceable or non-renounceable) rights issue the two most likely candidates.
Any Australian dollars raised to exchange into UK pounds would be at an FX rate that has moved against it moderately strongly in recent years, to approach a 2:1 basis today.
Hung jury for now
With nothing confirmed it will be notable to see how Slater & Gordon's share price reacts on Tuesday morning to Quindell's declarations, with a big share price swing suggesting the market believes a monster deal is afoot. Although, a moderate move would suggest the market is yet to be convinced Slater & Gordon is preparing to go all in.
Given the two companies recent track records, I would personally be surprised if anything like the £640 million sum is offered in the near future.
