Michael West talks to the Australian PI giant about its eventful Quindell acquisition
After over three months of intensive due diligence that saw Slater & Gordon (S&G) reconstruct the accounts of Quindell’s Professional Services Division (PSD) following accusations of dubious accounting, both sides agreed a £637m deal, which is expected to close this month, that will see S&G acquire the division and bolster its share of the UK’s highly competitive £2.5bn personal injury (PI) market.
The deal is the latest acquisition for the pioneering Australian-listed firm, which dramatically entered the UK market in 2012 with the £53.8m acquisition of Russell Jones & Walker. Since then, the firm has undertaken a series of purchases, growing its share of the UK PI market to the current 5%. This deal, however, is on another level, both in terms of size and complexity, boosting S&G’s market share to a leading 12% and giving it access to a wide range of non-legal businesses, such as claims management companies, and vehicle hire and repair services.
First contact was made between the two towards the end of 2014 – a year that had been turbulent for Quindell after a research note from investment house Gotham City Research criticising the firm’s accounting procedures sent its share price tumbling and the subsequent departure of chairman Rob Terry. Nonetheless, talks between S&G’s management and Quindell interim chairman David Currie progressed, with the pair entering a period of exclusive due diligence in January that saw S&G’s senior management, including managing director Andrew Grech, fly in from Australia in month-long stints to get the deal over the line.
Ken Fowlie served as lead for the Australian-listed firm and will become S&G’s managing director for UK and Europe, overseeing the firm’s current UK operations and PSD, which will be kept separate from the S&G brand. He says: ‘We took a very fundamental approach to assessing this opportunity – does it strategically make sense? And can we make an economic case which is compelling to our shareholders?’
The assessment saw S&G rebuild PSD’s books based on its own accounting procedures and excluding revenues from noise-induced hearing loss cases. As a result, PSD’s revenues for 2014 were adjusted down 46% from £645m to £350m and EBITDA down 76% from £289m to £70m. However, financial year 2016 projections based on case intake were more positive, with an EBITDA of £95m.
These figures not only include PSD revenues from legal services but also an array of businesses that form an end-to-end PI service, including claims management, both to its own customers as well as outside insurers; roadside recovery, car hire and repair services for road traffic accidents; providing physiotherapy; and after-the-event insurance.
The sprawling collection of businesses was an attractive proposition for S&G, argues Fowlie. ‘It was a good strategic fit. It opens channels of new business which had not been available before, securing enquires through relationships with insurers and insurance brokers. Not only that, PSD is an integrated platform which provides a range of services that will be beneficial to our portfolio. There are different ways we could have accumulated those assets, but Quindell presented a single opportunity to do so and that was attractive from an operational sense.’
‘Access to capital is a key competitive advantage we have over many firms.’
Ken Fowlie, Slater & Gordon
The acquisition is notable given the growing number of insurers forming alternative business structures, such as RSA’s joint venture with Parabis Law, which received approval from the Solicitors Regulation Authority in March. Such joint ventures mean insurers can still benefit from a case’s resolution and provide a workstream for law firms, after referral fees were banned by the Jackson reforms. Before the reforms, insurers could receive £200-£1,000 for referring a case to a law firm.
The Jackson reforms have also been helping to drive the recent consolidation of the PI market, increasing the need for economies of scale as work becomes more commoditised. Around 10,000 firms currently service the PI market but only outfits such as S&G, Irwin Mitchell, Parabis and Minster Law hold significant market share. Neil Rose, editor of Legal Futures, says: ‘There is a race to be the major consumer legal brand in the UK. The general feeling is that there will be three dominant brands that emerge and Slater & Gordon will want to be one of them.’
The deal also represents a rapid expansion for S&G, with PSD’s net assets of A$592m (£311m) greater than S&G’s A$471m (£247m) as of 31 December 2014.
The firm was able to build a war chest for the acquisition by holding an A$890m (£467m) share offer, which was backed with an A$375m (£197m) debt facility. Raising the capital was made easier by its recent introduction to the ASX 200, ensuring that tracker funds would have to hold shares. The acquisition is set to build on that advantage with S&G likely to move into the ASX 100.
Fowlie adds: ‘Access to capital is a key competitive advantage we have over many firms and we have used that opportunity several times to invest in transactions that make strategic sense.’
That advantage looks set to become increasingly important, with plenty of space in the market for further consolidation and as firms struggle with tightening margins in the post-Jackson era. Fowlie pledges that S&G’s run of UK expansion will continue. ‘We are not going to rest on our laurels or put the cue in the rack; we will continue to look for opportunities as they present themselves.’
michael.west@legalease.co.uk