Down 55%: Is it time to buy shares of Slater & Gordon Limited?

Credit: Patrick McKnight

It was the week that wasn’t for shareholders of Slater & Gordon Limited (ASX: SGH).

Although shares of the listed law firm managed to regain some composure on Thursday and Friday, the share price still crashed more than 55% to 37 cents a share, after falling as much as 72% to just 22.7 cents a share mid-way through Wednesday’s session.

That’s a long way from the heights achieved last year above the $8 per share mark at a time when investors were celebrating its growth-by-acquisition strategy, and cheering its shares to new all-time highs.

Source: ASX website; one-year share price chart for Slater & Gordon

Source: ASX website; one-year share price chart for Slater & Gordon

So, what exactly has happened to Slater & Gordon’s shares, and are they worth buying today?

Slater & Gordon’s troubles really began when the group announced the controversial acquisition of Quindell’s Professional Services division in the UK last year. After raising nearly $900 million in new capital (and borrowing more than $370 million from the banks) to fund the acquisition, analysts were soon questioning the true value of the division and whether Slater & Gordon had done their proper due diligence into the business.

In an announcement to the ASX last week, the company confirmed the concerns of those analysts, saying it had booked an $876.4 million non-cash impairment against its goodwill – the vast majority of which related to the Quindell acquisition (although it is now called Slater & Gordon Services). It shows that the company heavily overpaid for the division, destroying shareholder value in the process.

A large part of this comes as a result of changes to personal injury laws in the United Kingdom, which effectively reduce the need for lawyers in many cases involving minor motor accident injuries. As if that wasn’t bad enough, Slater & Gordon’s management team stated that it did not expect any impact on its guidance for the 2015-16 financial year as a result of those changes, buying time before delivering the bad news to investors.

Should you buy?

All in all, investors have a number of very good reasons to doubt the competency and integrity of Slater & Gordon’s management team, which is clearly a good reason to steer clear of owning the company’s shares.

Of course, some would also argue that Slater & Gordon’s share price has now slipped more than 95% since peaking at $8.07 about 11 months ago, helping to improve that risk vs reward payoff. However, there is a risk that the shares could have even further to fall, which is why I think it’s a good idea to continue avoiding Slater & Gordon’s shares.

The company, which now has a market value of just $130 million, has debt totalling more than $700 million. It will meet with its banking syndicate within the next few weeks where it will have to draw up a repayment plan which, if rejected, allows the banks to enforce a deadline for repayment in March 2017. If that happens, it’s difficult to see how the company could come up with that kind of cash.

Of course, the shares could bounce if the syndicate approves of the plan, but they could also plummet even further if a plan is rejected.

Foolish Takeaway

Successful investing is as much about avoiding the potentially big losers as it is finding the big winners. In this case, it would be wise to avoid Slater & Gordon’s shares even if that does mean missing out on a potential bounce.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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.

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