Over the weekend it was clear that an announcement was due from Quindell (LSE: QPP) and potential suitor Slater & Gordon (S&G) on Monday — but I wasn’t prepared for the nature of it!
Like many bears, I’d been expecting S&G to cherry-pick some of Quindell’s choicer assets rather than buying up the whole of its Professional Services Division (PSD), and certainly not for the figure of £640m that Quindell has been bandying about. But that’s what happened, as a deal worth an initial £637m in cash and an expected final value of £649m was announced.
Four-bagger
The result was a further spike in the share price on top of recent rises, taking the price to 145p by close on Monday — and providing a four-bagger for those who got in during the dip in December. So well done to those who called it right at the time and profited from their bravery.
But how did I, and the rest of the bears, get it wrong? Well, I’d based my pessimism essentially on two things.
Firstly there was ex-chairman Rob Terry’s sale of his remaining shares at around 40p. I assumed he’d know the full figures behind the company and would understand its true value better than most, and if he wanted out so cheaply then things must be bad.
Secondly there was the PwC report, commissioned at the behest of the company’s banks when questions were being raised about Quindell’s cashflow and liquidity. I, along with most, believed that past profit claims were too optimistic, having been based on accruals that just did not look realistic for the industry.
Accounts adjusted
We still haven’t heard the outcome of the report yet, with the release having been delayed from its end-of-February schedule. But on the question of Quindell’s past accounts, it seems we bears have actually been proved right. S&G has apparently discounted Quindell’s claimed 2014 EBITDA by around 75%, partly by excluding Quindell’s noise-induced hearing loss (NIHL) accounts — S&G described an “aggressive approach to reporting performance, resulting in over-investment in NIHL“.
Anyway, based on these, I’d come to the conclusion that there was probably very little value in Quindell as a whole, and it’s clear now that that was a mistake — at least as far as the value that S&G are putting on PSD.
I still reckon the PwC report will be highly critical when it finally appears, but S&G will know what it contains and will have made their bid based on that knowledge — so whatever PwC says will be largely immaterial now that the deal is agreed.
Puzzles
But the whole thing does still leave me with two puzzles. I can’t work out why S&G have valued the PSD business so highly, because it looks like too high a price to me, especially with the seller up against cashflow problems and with little in the way of alternatives. It has given S&G a better foothold in the UK’s injury claims market, but not at a bargain price.
I’m also a little disturbed to read that S&G’s due diligence relied in part on information given to them by Quindell and not independently verified, but I guess that’s for S&G shareholders to worry about now.
Why did he sell?
I’m also still completely flummoxed by Rob Terry’s share sale, as he doesn’t strike me as the kind of person to throw money away . Maybe we’ll never know the true reason behind his action. But there’s one thing for sure — we haven’t heard the last of this story.