Slater & Gordon Confirms Disaster

This is utterly appalling – the biggest blow up of a capital raising and shareholder value in the fastest possible time – just a matter of months.

Slater & Gordon yesterday revealed a first-half loss of almost $1 billion after it slashed the value of its United Kingdom assets by $814.2 million. The news sank the shares by more than 42% in early trading.

And it also revealed it only has two months to convince its banks, led by Westpac and the NAB, that it has a viable business plan to boost cash flow and cut debt.

The company claims it has a plan, but having blown up last year’s near $900 million equity issue, the company will struggle – it has little credibility with investors.

The current chairman, John Skippen obviously realises that – he says he is not standing for re-election this year.

It is also facing class actions (a grim irony) from other law firms, but if the company can’t convince the banks to keep it going and it fails, then its insurers will be in line for the legal actions.

The huge write-down comes after less than a year after it paid $1.3 billion to acquire the professional services division of Quindell, and raised nearly $900 million from shareholders to help finance the dud buy.

The firm said in an announcement delayed five days (the final last August was delayed for four days over accounting problems) it incurred a net loss after tax of $958.3 million in the six months ended December 31 from a $49.29 million profit in the six months to December 14.

The loss came despite a 82% jump in interim revenue to $479.6 million from $226.9 million a year earlier. Naturally Slater & Gordon says it will not be paying a dividend.

The shares ended the day down 30% at 58 cents. That left the shares down 90% in the last year.

The law firm said its priority now was to cut debt, which has ballooned to $741 million at the end of December from $623 million at the end of June, and that it would sack people in Britain as it contracts and cuts the number of offices to reduce costs.

The company also reported negative net operating cash flow of $83 million and negative earnings before tax depreciation amortisation and work in progress of $17.8 million.

On top of the Quindell hit, Slater and Gordon also surprised investors by revealing a further $60 million impairment on its UK and Australian general law assets to total $876 million.

The write-downs come after a near eight-month-long review into the company’s book-keeping by the Australian Securities and Investment Commission (ASIC), which released a statement on Monday about its inquiries.

"ASIC’s inquiries mainly concerned the recoverable amount of goodwill attributable to the company’s Australian and UK businesses, the recognition of fee revenue and related WIP, provisioning against debtors and disbursement assets, and the basis for classifying WIP and disbursement assets as current assets," it said.

“ASIC’s inquiries on revenue recognition and WIP focussed on the appropriateness of accounting policies adopted and the testing of WIP estimates and assumptions against historical data."

ASIC said its inquiry was now complete after Slater & Gordon wrote down the goodwill of its UK and Australian acquisitions and reduced the value of its work-in-progress.

The law firm’s lenders led by Westpac and National Australia Bank appointed restructuring and insolvency advisors McGrath Nicol in Australia and FTI Consulting in the UK to examine S&G’s financial books after the full-year earnings guidance of $205 million was abandoned earlier this year.

Fairfax Media reported that Westpac is understood to have moved its Slater & Gordon exposure to its “bad” loan book.

Slater & Gordon paid $1.3 billion for Quindell in March of last year through a debt and an $890 million cash issue. The shares were around $6.93, and have plunged ever since as the purchase turned to be a house of cards, built on dud accounting, poor due diligence and incompetent management oversight.

The $118 million surge in debt in six months, or nearly 420 million a month, has the banks worried, so to has the negative cash flow in the half year. The looming class actions are the last concern.

The company says it has agreed to deliver an operating plan and restructuring proposal to its banking syndicate and financial advisers in March, with any amendments to be agreed by April 30.

And failure to deliver a plan the bank can live with, will see the maturity date of S&G’s outstanding loans being brought forward to March 2017 — a date that analysts say S&G currently can’t meet meet.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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