Entrepreneurial law firm Slater & Gordon Limited (ASX: SGH) today confirmed it had completed its acquisition of Walker Smith Way law firm in the UK, while regulatory approval has also been granted for its $1.2 billion purchase of Quindell PLC's professional services division.
Unsurprisingly it's the aggressive expansion into the UK that has caught the market's attention with the $1.2 billion Quindell offer funded by $375 million bank debt and an $890 million entitlement offer bigger than most IPOs that will hit the ASX in 2015.
Slater & Gordon's management team agreed to pay 6.9x earnings for the professional services division of the AIM-listed Quindell, which was an offer that may have made some of Quindell's shareholders think Christmas had come early given its disastrous recent record.
To raise the required funds Slater & Gordon offered new shares at $6.37, a 10% discount to its theoretical ex-rights price at the time, and the fact the stock has now drifted to $6.29 suggests the market is unconvinced by the deal's merits.
For existing operations the firm expects full year revenues of $500 million (excluding announced UK acquisitions), with cash from operations as a percentage of net profit at more than 70%. The company also stands to benefit from an exchange rate tailwind if the Aussie dollar continues to track lower against a UK pound that may strengthen in the post UK election months ahead.
Like listed rival Shine Corporate Ltd (ASX: SHJ), Slater & Gordon operates in the consumer-facing, high volume, low value legal practice areas, which means operating margins are especially important. The company has built some brand strength, but this will mean little if it's unable to manage its shift up the risk curve. Overall, Slater & Gordon can expect to face a challenging 12 to 18 months, as the company's debt load and aggressive acquisition policy will come into focus.
Investors looking for alternatives on the ASX could consider litigation funder Bentham IMF Ltd (ASX: IMF), or fast-rising intellectual property specialist IPH Ltd (ASX: IPH), an ASX newcomer now valued at around $630 million.
Smart investors probably wouldn't be taking a chance on Slater & Gordon now given the risks ahead of it, they'd be out shopping for gangbusters growth stocks on attractive valuations.
