| More to Slater & Gordon's problems than just the UK |
As law firm Slater & Gordon comes under increasing pressure, questions are being asked when the company's problems actually began.
As class action law firms home in on Slater & Gordon's woes, there are some in the market who believe the seeds for the company's problems were sowed years earlier.
Slater & Gordon has had the year from hell, with the company's share price tumbling more than 90 per cent.
Now serious questions are being asked about the state of company's balance sheet, with analysts warning of goodwill impairments that could give Slater & Gordon's bankers a say over whether to cut dividends and costs, including potentially staff numbers.
The falls have been sparked by a run of bad news that started in June when the law firm confirmed it was facing a major investigation.
That news came just months after what was supposed to be Slater & Gordon's big moment on the global stage – its $1.3 billion acquisition of the professional services division of UK firm Quindell.
But it soon emerged that Quindell itself was in the sights of British corporate regulators over accounting discrepancies.
Slater & Gordon's accounting issues led to Slater & Gordon admitting that it has overstated its cash receipts through the accounting of its "work in progress", which is the expected cash that is generated when a case is won.
Although the firm said this was offset by the same amount being added to the calculation of total payments to suppliers and employees and net cash for the period was unaffected.
The restatement raised fresh questions about the group's cashflows, and whether the company has become over-reliant on acquisitions to fuel its growth.
Despite all its woes, Slater & Gordon issued a positive outlook in August, which the company reaffirmed as recently as the last day of November.
But then the company revealed it faced a potential hit from regulatory changes in the UK. On December 17 Slater & Gordon walked away from its guidance, citing worse than expected performance in its UK arm and a review of its forecasting processes.
The subsequent share price fall led rival Australian firm Maurice Blackburn to announce it is launching a class action against Slater & Gordon, while ACA Lawyers is in the process of investigating a class action claim against the firm.
Confidence of staff is also starting to waver. Slater & Gordon's decision to not renew the Melbourne CBD lease of Nowicki Carbone, a firm it recently acquired, and to ask employees to preference which suburban office to which they would like to relocate, has led to staff contacting BusinessDay concerned their jobs were on the line. However, it is understood staff levels are expected to remain the same for the time being.
Over the past six months, some of the blame for Slater & Gordon's share price demise has been placed on hedge funds short-selling the stock and reaping the profits from the company's falling share price.
VGI, a hedge fund that raised concerns about Slater & Gordon's cash flows among other concerns, led the charge. The group, which bought in at around $6.40, is believed to have exited the stock on around November 25 when shares hit $1.
But other ASX watchers say the share price fall is not just down to shorters – the market has lost faith in what was in 2013 and 2014 a rolled-gold darling.
Deutsche Bank analyst Dominic Rose told clients that along with the company's near-term earnings uncertainty and UK regulatory risks, Slater & Gordon was grappling with "prevailing negative investor sentiment, which will likely take some time to restore".
Behind some of the concern is whether Slater & Gordon has been too heavily reliant on acquisitions for bumper results rather than organic growth.
Since listing in 2007, the group has undertaken more than 50 acquisitions, many of those in the past few years. The acquisitions have boosted revenue and allowed the company to eat up market share.
It's also boosted its share price.
Between its 2007 listing and the start of 2013, Slater & Gordon's share price bumped along at between $1.35 and $2.50.
Then things started to take off. Between January 3, 2013 and January 4, 2014 Slater & Gordon's shares rose from $2.20 to $4.72. By the end of 2014, it's shares were at $6.40 and rose to a height of $7.78 in February this year.
The more than tripling of the company's share price in a little over two years was driven by the company's foray into the UK market in May 2012 through the purchase of its first British investment, law firm Russell Jones and Walker.
At first Slater & Gordon's UK foray was a marvellous success. For the year ending June 2013, Slaters reported a $79.9 million lift in revenue, or a 36.7 per cent rise, with the UK business delivering $70.5 million of that revenue uplift to the company.
Over calendar 2013, Slater & Gordon announced plans to acquire several UK firms including Taylor Vinters, Goodmans Solicitors, John Pickering and Partners, Fentons Solicitors and Pannone Solicitors.
It acquired more UK firms, and Australian firms, over the course of calendar 2014. By early 2015, the market was waiting for Slater & Gordon's next acquisition, yet sources said the size of its Quindell acquisition, being in excess of $1 billion, was a surprise.
The acquisition of each firm boosted the ''work in progress'' line in Slater & Gordon's accounts, indicating there would be continual growth in the firms' revenues as each case was settled.
Yet by June this year, Slater & Gordon told the market that along with Quindell's accounting issues, the cash receipts and payments for its first UK acquisition, Russell Jones and Walker, also needed to be revised.
"Everyone is looking at what's gone wrong in the UK, but putting Quindell to one side, there's a clear pattern here Slaters is using acquisitions to offset weak organic growth at home," a banking source said.
UBS analyst Martin Byers says growth in personal injury claims in the UK and Australia is expected to run at 1 per cent in the next couple of years, but declining claims volumes continue to be more than offset by increasing claims values". Slater & Gordon's general law is forecast to grow at between 3 per cent and 4 per cent due to the legal needs of the ageing population and property transactions.
While an uplift in general law growth to 4 per cent is a positive, several sources doubt whether it will be enough to convince investors the company can restore its former growth profile.
Says one market watcher: "It will be very interesting to see if the company can continue the same rate of growth it has shown in the past without making acquisitions. I guess time will tell."
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