Judging by the market reaction to this “transformational” $1.27 billion purchase of colourful UK firm Quindell, Slater and Gordon appears to have pulled off quite a coup in the mother country. And this may well have been assisted by a sustained campaign that the venerable Financial Times has run against S&G’s target.
Following on from more than 30 previous critical posts on its Alphaville blog, the Financial Times cast a sceptical eye over the proposed acquisition.
In a blog post this week headlined “Dear Slater and Gordon shareholders”, the FT posed a raft of questions, particularly focusing on the non-legal businesses being purchased by what has previously been an ASX-listed legal pure play.
One thing to realise about Quindell Professional Services is the variety of related businesses within it, including property services, “one of the top three credit hire and repair network managers in the UK”, as well as a network of physiotherapists.
Quindell only described these businesses haphazardly in a communications strategy that tended towards technobabble and played down the role of the law firm until it was too large to ignore. For instance, last year, some professional services revenues came from “brand extension into Connected Home and other initiatives”.
Note the breakdown of professional services revenues reported in the first half of last year: 180 million pounds from legal services, 74 million pounds from business process services, and 40 million pounds from health services.
Although note also the revenue and profit numbers aren’t to be trusted, as they are likely to be restated following a PwC review of aggressive accounting policies. It might be worth asking S&G for a detailed breakdown for each bit of the business it has agreed to buy.
There has been some disquiet in the UK that S&G was given access to the PwC report when this still hasn’t been released to the market. If this were Australia, Quindell shareholders would get the benefit of an independent expert’s report before voting on the sale of 90% of its business at a shareholders meeting to be held in the coastal city of Southampton on April 17.
Based on this London Stock Exchange announcement overnight, it looks like Quindell understated the profits of the professional services division, which it now claims made a whopping 130.7 million pounds in the six months to June 30 2014, up from its earlier announcement of 113.4 million pounds.
This prompted another whack at Quindell from the FT.
Certainly Australian investors have responded very positively to the deal.
Underwriters Citi and Macquarie barely raised a sweat earning their $16 million in fees as the accelerated $608 million institutional component of the $890 million Slater and Gordon capital raising proved highly popular.
S&G is seeking to issue 140 million new shares at $6.37 on a two-for-three basis. The stock closed at $7.55 last Friday but returned to the market this morning and hit a high of $7.75 before settling around $7.70, which is well above the theoretical post-issue price of $7.08.
The size of the institutional component suggests that many of the millionaire lawyer shareholders, who collectively own more than 20% of Slaters, called themselves “sophisticated” and went with the institutional offer.
This led to a lower-than-normal participation rate of about 80% in the institutional offer, which meant third parties were offered a chance to bid for about 19 million rejected shares in yesterday’s institutional bookbuild.
As usual, The Australian Financial Review’s Street Talk column was on the drip and received the tip-off yesterday morning that 20 million shares had been rejected in the institutional offer.
We’re now just left with the $282 million retail offer, which opens on April 9 and runs until April 22. Historically, retail participation rates are poor and the resultant bookbuild produces a lower premium for non-participants than what the institutions fetch.
We haven’t seen a capital raising before where so many “sophisticated retail investors” (the rich lawyers) had the option of going early by selling their rights into the institutional bookbuild.
Traditionally, that would be the smart move, as history shows retail investors tend to do worse with the later auction.
This Australian Shareholders’ Association list reveals that the likes of Bank of Queensland, Tabcorp, Primary Health Care, Billabong, Westfield, Alumina, Boral, Orica and even ASX Ltd itself have all delivered an inferior result for their retail investors when conducting two separate auctions of the respective shortfalls.
This Slater and Gordon capital raising is unique in a number of respects. Never before has a company, capitalised at just $1.5 billion, raised this much money for an all-cash acquisition, let alone for something as colourful and emerging as Quindell.
Effectively, it is like a foreign company suddenly doing an $890 million IPO on the Australian market in just three days before Easter.
Yet the market just loves it because Slater and Gordon is, today, effectively capitalised at about $2.7 billion, and the $1.27 billion acquisition has already created almost $200 million in shareholder value, despite the leakage of $40 million in non-recoverable transaction costs.
This sort of re-rating suggests there could be a risk of Quindell shareholders voting the deal down on April 17, although that doesn’t usually happen when there is a unanimous board recommendation.