By Tom Winnifrith | Wednesday 30 November 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
The Aussie poltroons Slater & Gordon (SGH) who recklessly paid £649 million for the fraudulent businesses of Quindell has announced that it is making a claim on £53 million of that still held in an escrow account by Watchstone (WTG). Slater says that it has obtained an opinion from an independent barrister in respect of the warranties given and the escrow cash and that the brief says it has, on balance, a prospect of success. Oh dear. The only winners here will be the lawyers (other than S&G).
Slater has yet to divulge that opinion or the "key evidence in the possession of SGH which would be relevant to the merits and quantum of the warranty claim." That, presumably, is evidence of fraud. Watchstone says that it will seek disclosure on that evidence and one imagines that the Serious Fraud Office would also like to take a butchers.
Notwithstanding the fact that it has not seen the evidence or the opinion of the barrister Watchstone says that it "remains satisfied that the warranty claim has no merit and will defend it robustly if proceedings are brought." That seems a bold statement to make without seeing any evidence but, I suppose, what else could it say?.
Notwithstanding that Watchstone says pro tem there will be no further distributions made. I should cocoa. It says it has net cash of £83 million (excluding the escrow funds) but defending such a claim could be costly, Watchstone's remaining - worthless - businesses continue to burn cash and it still faces possible claims from shareholders who lost out due to the fraud which will also be costly to defend.
So what happens now? Watchstone shares are down to 175p valuing it at £80.5 million. One images that its cash pile could, for the reasons given above, fall quite sharply and since its remaining businesses are worthless it has to look like a poor risk reward play at this level.It is probably not a short but there is no reason to buy or hold.
As for Slater & Gordon, its shares are now 32 Aussie cents (down from $8 when it bought Quenron). The issue here is its debts which are now being valued at 36 cents on the dollar. The debts are so large that whether it wins or loses this case its shareholders are still screwed. Quenron has sunk it. Its equity is worthless whatever happens to the escrow monies.
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