Australian law firm Slater & Gordon has agreed to buy the Professional Services Division (PSD) of Quindell (LSE: QPP) for approximately £650m, as it makes a push to grow its share in the UK personal injury market.
So, who said that Quindell had cooked the books? Where are all those pundits suggesting that its equity was not worth a penny?
The most pressing question to me now, however, is whether its shares will rally to 300p from its current price of c.155p!
Let me explain…
Show Me The Money!
There has always been a chance that Quindell would rally on takeover news. For short sellers, it is not going to be a very nice day in the office.
The PSD unit will be sold for an initial cash consideration of £637m “and further contingent cash consideration payable in respect of the future settlement of its clients’ noise induced hearing loss (“NIHL”) cases (“Disposal”),” Quindell said.
The total cash amount payable to Quindell “is approximately £649m”. Proceeds from the sale will be used for several purposes, including cash returns to shareholders of up to £500m.
“The precise amount of any distribution to shareholders has not yet been determined,” but based on the £500m figure, downside for Quindell shareholders could be at least 20%. I’ll show my workings…
At the time of writing, the shares change hands around 150p, for an implied market cap of £660m.
One way to value Quindell is either via considering the amount of cash that it may fetch from the divestment or the cash that it may redistribute to shareholders.
Sell, Sell, Sell
What the share price movement suggests is that it takes more than lots of courage and nerves of steel to stay invested right now!
You really need to assume that the board will have enough cash to spare with shareholders once all the calculations are done. Quindell needs cash to repay gross debt of about £45.6m and funds for working capital needs as well as investment in the retained businesses.
Sell, sell sell is the obvious recommendation — unless, that is, you believe Quindell has lined up a fantastic business plan. The shares rose to 180p in early trade but it looks like some investors may have not done their homework properly — blame Monday mornings for that….
What’s left behind? An Empty Box
“The board also announces a clear strategy for the group should the disposal complete,” Quindell pointed out. Great news: what’s that plan?
Quindell said on Monday that it would focus on its range of technology businesses with strong growth potential, disposing of non-core businesses.
Robert Fielding, the chief executive, said that “should the transaction complete, he would feel proud to leave behind an exciting technology business set for substantial growth and success.”
So, Mr Fielding will resign to lead PSD if the deal goes through, while many board members would leave the company. Any future strategy hinges on the sale of PSD, and all the way though the release it clearly reveals that the risk the deal may not go through is real.
So, let’s assume for a second that the deal does not materialise — after all, third-party risk can be pretty damn high when the buyer is a law firm, and Slater & Gordon doesn’t have the cash, but still needs to raise equity capital to fund the purchase.
Then, Quindell will comprise a range of technology businesses “with strong growth potential”, in particular:
- “connected car and telematics (Himex, iter8) – these businesses are relatively early stage with a number of contracts with major insurers in North America”;
- “insurance claims management systems (Quindell Enterprise Technology Solutions) – this is an established business which provides high quality enterprise software and recently won the XCelent Award 2015 for Claims Administration”; and
- “insurance brokerage utilising technology and telematics (Ingenie) – this is a fast growing, young driver specialist in the UK, which recently commenced operations in Canada and won the Insurance Times Award for Innovation in December 2014.”
“This strategy will require some prudent capital investment supplemented by the cash flow such businesses produce themselves,” Quindell concluded.
Ultimately, then, the pundits may end up being right in the end if the sale is not successfully executed by May…