In theory, the shares of Quindell (LSE: QPP) should be trading considerably higher than their current 90p.
On 30 March, the company announced the conditional sale of its large Professional Services Division to Australian law firm Slater & Gordon for £637m. Management said it had agreed to place £50m into an escrow account to cover any compensation that might arise under the Sale and Purchase Agreement. It also said that paying off debt (c. £46m at the time), and retaining sufficient funds for working capital and investment in the remaining businesses, would leave:
“Majority of cash proceeds from the Disposal to fund substantial return of capital to Shareholders, expected in the second half of 2015 [subsequently pinned down to “before the end of November”] – precise amount of any distribution to Shareholders has not yet been determined but the Directors expect that, in aggregate, the initial tranche will be up to £500 million (representing in excess of £1 per share)”.
So, shareholders have the prospect of £1+ per share cash in their pockets. Then there is up to £50m to be released from escrow (in November 2016); further cash over the next couple of years from Slater & Gordon (Quindell reckons approximately £40m) as hearing loss cases settle; and cash of an unknown quantum from the sale of some of the retained businesses that the company has designated non-core.
And yet Quindell’s shares are currently trading at just 90p. Why?
The company released its long-delayed, and truly shocking, 2014 results last week. On the same day, we learned that investigations are underway by the Financial Reporting Council (FRC), the Financial Conduct Authority (FCA) and the Serious Fraud Office (SFO). These are investigations into historic matters at “old” Quindell, but they could still have an impact on “new” Quindell, as I’ll come to shortly.
Within Quindell’s results and report last week there were some subtle changes in management’s language on the subject of the capital return, notably in the sentence:
“the current desire of the Board remains to make a capital distribution of at least £1 per ordinary share”. [My bold]
The word “remains” suggests this is a simple reiteration of past statements, but, in fact, it’s not. The Board has never previously used the phrase “current desire” in its numerous references to the capital return in past RNS (regulatory new service) announcements. The phrase implies a lot more uncertainty (by way of the word “desire”) and a lot less permanency (by way of the word “current”) than the Board’s previous language on the subject.
So, what has changed? The investigation by the FCA could lead to a fine for the company, which could reduce the amount of cash available for distribution to shareholders. The FRC and SFO investigations don’t directly impact the company’s coffers, but could bolster the prospects of a class action that is currently being put together on behalf of Quindell investors who lost money and who are after compensation. And we now know there could be a lot of them, because last week’s results and statements by Quindell, show that the company had been misleading investors going all the way back to its stock market debut in 2011.
Which brings us to the crux of the matter. Any capital return Quindell may make is dependent on Court approval. Before shareholders see a penny the Court will need to be satisfied that Quindell adequately allows for all potential liabilities of the company.
Potential fines and potential compensation as a result of a class action — which could drag on for years, even if it weren’t ultimately successful — put both the quantum and timing of any capital return to shareholders in doubt.
Aside from the Court decision, which is out of Quindell’s hands, the directors “current desire” to return £1+ a share could also change. For example, management could decide that the company needs more working capital or greater investment in its retained businesses than previously thought, as a result of an upcoming full scope audit of the company’s interim financial statements for the period ended 30 June.
Taking into account everything I’ve discussed — and other uncertainties I haven’t got space to enumerate — I’m really not surprised that Quindell’s shares are currently trading below the ostensible floor price of £1. I think the discount is more than warranted, and this is not a stock I’ll be investing in myself.
