Deal generates material earnings enhancement
Slater & Gordon Ltd (ASX:SGH) has announced the terms of its acquisition of Quindell’s Professional Services Division (PSD) for an initial cash consideration of £637m (A$1,225m) with a potential further £40m earnout. The deal will be financed through an A$890m equity raise and A$375m debt (both fully underwritten). The company's estimated EPS enhancement is 40%+ (our upgrade is higher), with the acquisition priced at c 7x EBITDA. Strategically, it provides further economies of scale and the opportunity to refocus PSD’s business.
Strategic logic
The Quindell business more than doubles SGH’s presence in a market where it can achieve economies of scale. Quindell also brings an enhanced infrastructure with, for example, a call centre allowing SGH better communication with all its customers. It also gives an immediate, critical mass in a subsector where SGH was previously underrepresented (Fast Track portal claims). SGH will refocus the business on its historic core (road traffic accidents/employer liability and public liability), at least initially, putting new cases of hearing loss on hold. Management highlights that potential core business had been turned down as Quindell focused resource on the latter with an unproven financial outcome.
How can such an uplift to EPS be achieved?
Before the deal, the market was valuing the Quindell portfolio at well under half the EBITDA multiple it was willing to give to SGH, thus creating the opportunity for SGH to make such an earnings-enhancing deal. We believe this was partially due to concerns about accounting, partially due to the new management at Quindell having yet to prove itself with this company and partially around the dependence on a new product and as yet untested product area, noise-induced hearing loss (NIHL). SGH’s business is much more about leveraging existing skills rather than blue sky promises. For Quindell it provides a cash exit, giving shareholders an immediate significant uplift to the pre-deal valuation.
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