Why is Slater & Gordon Limited still talking down its own market value?

Credit: Дима

Today embattled law firm Slater & Gordon Limited (ASX: SGH) updated its remaining shareholders as to its operational progress under a new structure that sees its UK operations divested and owned by its U.S. private equity owners.

The restructure of and recapitalisation of the all-but-bankrupt Slater & Gordon was complex and involved around 1,000 pages of documents for some less-than-sophisticated retail shareholders to wade through, but in summary resulted in a debt-for-equity swap that saw its new owners take on some of its $1 billion debt mountain. This after some of its original creditors such as National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) agreed to take substantial haircuts on the debt owed to them.

As a result the U.S. private equity or special situations / distressed debt specialists now own around 95% of the business, with retail investors left with the other 5% or so after their shareholdings were also consolidated on a 1-f0r-100 basis. In other words anyone who rode Slater & Gordon shares to the bottom has lost 99% of their investment.

The only (feint) light at the end of the tunnel is that Slater & Gordon’s Australian business now has a lot of its debt written off and the chance to return to profitability. In this goldilocks scenario it could potentially grow its share price over a 3 to 5 year period for anyone stubborn enough to hang on.

Today the group reported a net asset position of $90.1 million, compared to net liabilities of $248.1 million in the prior corresponding period. However, the restructured Australian operating group is still struggling with a net loss from continuing operations of $21.2 million from revenues of $96.3 million over the period. Cash outflows for the period were just in the red at $0.8 million.

The company also repeated the unusual step of warning shareholders that it believed its scrip was overvalued at $1.81, flagging that KPMG reportedly valued it at between 30 cents and $1.10 per share.

Needless to say this business is about as far from investment grade as you get and it might just be a matter of time before its U.S. owners look to buy out remaining shareholders and delist the business. This may explain why its US owners now seem so keen to talk down its own implied equity value! It remains an avoid.

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