After months of speculation, Australia's leading personal injury (PI) law firm, Slater & Gordon Limited (ASX: SGH), has announced it will acquire the Professional Services Division (PSD) of the UK firm, Quindell PLC.
The deal, worth $1,225 million, will see Slater & Gordon become the largest PI firm in the UK, jumping up from its rank at number three.
Quindell is believed to control 7% of the approximate $4.81 billion UK market.
In the past year, FTSE-listed shares of Quindell PLC have fallen over 76% as the group is subject to a probe into potentially poor accounting practices.
To fund the landmark deal for the PSD, Slater & Gordon will take on $375 million of bank debt and undertake an $890 million two-for-three pro rata accelerated renounceable entitlement offer.
That means, shareholders on the company's registry as of 7pm (Melbourne time) on Thursday 2 April 2015, will have the right to buy two new shares for every three they already hold at a price of $6.37.
Slater & Gordon shares closed at $7.55 on Friday.
The deal is subject to a majority vote from Quindell shareholders, which will be held on 17 April 2015. If successful, the deal is expected to close in May 2015.
What the deal will do for Slater & Gordon
Slater & Gordon say the deal features a number of significant benefits, including:
- Positioning it as the UK's leading PI law firm
- Providing channels for new business whilst complementing and extending current processes and infrastructure
- Upside potential from a revival of the PSD business
- 30% earnings per share accretive
- Potentially enabling the company for entry into the S&P/ASX 100 (Index: ^AXTO) (ASX: XTO)
In an ASX announcement this morning, Slater & Gordon's Managing Director Andrew Grech said, "The acquisition is a transformational opportunity, and will allow Slater & Gordon to further penetrate the highly fragmented £2.5bn UK personal injury market… The combination of Slater & Gordon and PSD creates the number one personal injury law firm group in the UK…It further diversifies our sources of legal work, broadening access to claims management companies, insurers and insurance brokers."
Following the acquisition, Slater and Gordon is expected to have gearing of between 30% and 40%, with net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) of 1.9 times.
Should you buy Slater & Gordon shares?
This is a landmark deal for Slater & Gordon and its most brazen. Whilst the firm said it has reviewed 8,000 case files whilst conducting its due diligence, a number of teething issues could result from such a large acquisition over time.
Indeed, despite Slater & Gordon confirming its 2015 financial year revenue and cash flow guidance, investors should remain cautiously optimistic about the deal.
As always, before committing to take up of your offer for new shares, it's important to maintain prudent levels of diversification within your portfolio and refrain from being heavily exposed to any one sector or company.
