Slater & Gordon in search of a miracle

Both Slater & Gordon and George Pell could do with some divine assistance after facing their inquisitors today, but only one party was offering a heartfelt sorry.

“I apologise on behalf of the board,’’ said Slater & Gordon (SGH, $67.5c) chair John Skippen after the law firm posted an horrific $958m loss, with $876m relating to a goodwill impairment.

CEO Andrew Grech added, superfluously: “Clearly the results are well below our expectations.’’

Of the writedown, $814m relates to Slater & Gordon Solutions, the acquired, renamed UK firm that is central to the firm’s woes.

The core driver here is a revised view on the worth of future cash flows resulting from a mooted British regulatory crackdown on motor injury claims.

But a key point is that the firm’s problems spread well below the revenue assumptions around the $1.3 billion purchase of Quindell’s professional services practice.

The UK business is underperforming more generally, another issue being the slower than expected resolution of a portfolio of noise-related hearing loss claims.

The goodwill component also includes a $38.8m impairment of the local personal injury practice (the result of an obscure legislative change) and a $13.9m write-off of the general law practice (“forecast cash flows did not support the good will balance’’).

Another driver is the adoption of a new accounting standard that requires revenues on a “no-win, no-fee” basis to be recognised when it is “highly probable that a significant reversal” of revenue will not occur.

Previously, the benchmark was whether the revenue would “probably” materialise.

Like Cardinal Pell’s testimony, today’s disclosure (on the last allowable day of the reporting season) was never going to be a walk through daisy fields.

The question now is what can be salvaged from the smouldering wreckage post the disastrous UK purchase.

Slater & Gordon management stresses the Australian business is performing well, with normalised earnings increasing 15 per cent to $16.4m

“Our staff have not been distracted by the noise surrounding our company’s performance,’’ Skippen says.

(Given the din, we commend management for investing in the best noise-cancelling headphones).

Slater’s survival ultimately rests on the banks’ attitude to the groaning $741m of debt, with the syndicate due to mull a restructuring proposal this month.

Skippen today revealed that Grech offered to resign, “taking into consideration the issues facing the company’’.

But the board unanimously rejected the offer, given the need for stability ahead of these crucial creditor negotiations.

Arguably, heads should roll. But then again mum always insisted that we clean up our own mess.

Investors initially pushed the stock down 43 per cent to a fresh low of 47c, but by midday the loss had been shaved to 19 per cent.

On our reckoning, it will be a divine miracle indeed if the firm can overcome the adversities of a $1.3bn dud acquisition.

The deal, Skippen notes, was signed despite the input of 70 lawyers and other tax and accounting advice.

Should these parties be squirming, too?

* The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not hold shares in the stocks mentioned.