By Tom Winnifrith, The Sheriff of AIM | Monday 7 March 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.
Watchstone (WTG) has offloaded another of the joke/frauds bought during the Rob Terry era to its management at a stonking loss. The sale of Quintica for £1.35 million is good news for Watchstone but shows once again what a crook the fraudster Rob Terry was.
The boss of Quintica is paying £500,000 up front, £500,000 by January 2017 and repaying £350,000 of intercompany debt. For Watchstone that is great as in calendar 2015 Quintica made a loss of £1.9 million down from £2.1 million in 2014 so it has got a few quid in for what was a loss maker. That is a result. But as for Terry....
When Quintica was acquired in September 2012, the consideration was largely satisfied in Ordinary Shares in the Company, giving rise to goodwill of £5.9 million. The Group is expected to recognise an overall loss on the disposal of Quintica of approximately £5.7 million for the year ended 31 December 2015, due to goodwill impairment. This impairment would have been recognised irrespective of the disposal.
In other words Quindell/Watchstone has sold the business to the management for a fraction of what it bought it for and it has racked up losses ever since Terry bought it. So why did he buy it? . Now let's go back to what the fraudster said when announcing the deal back in September 2012:
Quintica has offices in South Africa, Ghana, Nigeria, Kenya, Uganda, Dubai and Abu Dhabi, delivering a combination of technology solutions and supply chain management services to a number of the major national carriers and multinational telecom groups. Quintica, a business that Quindell has recently taken a circa 7.7% ownership in, has been working closely with Quindell over the past 12 months on a number of strategic implementations of Quindell's Challenger OSS technology. As well as currently being engaged in a number of key joint bid opportunities, Quintica, in combination with Quindell has recently won a major contract with a leading multinational telecoms group for their South African operation.
The acquisition of Quintica allows Quindell to further strengthen its systems integration capability for its technology solutions and provides a platform for further expansion into a geography where the demand for software and services continues to expand at a rapid rate.
The terms of the acquisition have been satisfied by the issue today of 38,461,538 Quindell shares and circa £37,000 in cash and the settlement of shareholder loans totalling circa £592,000 by a payment of circa £271,000 in cash at completion and the issue of a further 3,025,128 shares on the first anniversary of completion. In return Quintica has warranted profit after tax of circa £710,000 for the twelve month period ending 30 June 2013 (the "Target Profit") and cash generated during the period to be no less than £530,000 (the "Cash Target"). The shares will be subject to lock in of between 12 and 36 months from the date of issue. In the event that Quintica misses its Target Profit or Cash Target, the Group will receive compensation from the vendors in the form of cash equal to circa 6.5x or 8.7x the profit or cash shortfall respectively. In the year ended 30 June 2012, the last full year for which management accounts are available, Quintica recorded revenues of circa £5.0 million.
As previously announced by the Company in its Acquisition and Strategy Update on 15 August 2012, this approach to acquiring companies using warranted targets has proven to be a successful method of acquiring companies, consistently delivering an achievement of over 150% of their respective targets.
Whereas the acquisition of Quintica is only expected to be slightly Earnings Per Share ("EPS") enhancing in the remaining period to December 2012, the Company expects it to be significantly EPS enhancing during 2013.
Of course it is possible that Quintica hit its targets in 2013 but then went down the pan thereafter at a trading level. Or is it possible that the cash/shares Quenron injected to get a 7.7% stake were used to buy bogus products from Quindell pre-acqusition and somehow the favour was returned post deal. This is the Himex type panama pump.
Whatever happened it was clearly a crap deal for Quindell. Even if it made its 2013 target - which I doubt - it seems as if ownership of Quintica will have cost Quindell a net £9 million plus over three years. Not exactly the earnings enhancing deal the fraudster Terry promised.
No doubt the Serious Fraud Office will be able to establish exactly what went on here.
As for Watchstone while this is good news I would flag up that whe releasing 2014 results in July 2015 it said it was writing off all the dubious goodwill. I noted at the time that this was not likely to be the case. The reality is that the operations it still owns are all worthless junk and frauds so whe 2015 numbers are published expect a stack more writedowns as the joke balance sheet disappears.
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