Beleaguered law firm Slater & Gordon Limited (ASX: SGH) was one of the last companies to report in earnings season, a distinction usually reserved for companies in a troubled state – and so it was with Slater.
The company announced losses of $547 million, and a significant recapitalisation that will see the UK operations being cut away and the 'Senior Lenders' owning 95% of the company's equity.
A group of hedge funds, led by Anchorage Capital, will convert the debt that Slater & Gordon owes them into equity in the form of Slater & Gordon shares. This will see them owning roughly 95% of the company. Existing shareholders' stakes will be diluted by 1/20th. Anchorage and co will provide additional funds for working capital to both the UK and the Australian businesses.
However, as part of the recapitalisation, the entirety of Slater & Gordon's UK operations will be transferred away from Slater & Gordon into a separate company, 'HoldCo' owned by the senior lenders. Slater & Gordon's current shareholders will no longer have any interest in the UK operations, although Slater stands to receive up to $40 million from any Watchstone-related lawsuits. This money will be first applied to any outstanding debt (Slater will still have significant debt of up to $125 million) and is not available for shareholders.
A wipeout for shareholders
It's hard to say for sure what will happen to the price of Slater & Gordon shares from here, as I have never followed a company after a major recapitalisation like this. However, from a business perspective, Slater & Gordon continues to struggle and it reported a further $39 million in cash outflows for the year despite all its restructuring efforts. Many well-connected and experienced staff have also jumped ship in recent years.
With the UK operations gone, new management and a new board, Slater & Gordon hopes to re-focus on operating profitably in its well-established Australian business. Obviously, Anchorage is now hugely incentivised to make it work, although I suspect it could take years. Several shareholders I've spoken to have told me that their shares now aren't worth any more than the brokerage it would cost to sell them. In that case, there's no harm in holding, although my instinct would be to sell and put the whole thing behind me.
Either way, it looks unlikely that Slater & Gordon will return to its glory in the days of old.
