Discover more from Upside Downside Capital
The £63m question at Watchstone Group Plc
Tiny listed company could in theory be awarded multiples of their market capitalisation in damages next month... but NOT pitching as long investment idea following trial insights
Share Price approx. £0.30 / 30p
Market Cap. c£14m
Watchstone Group Plc, formerly Quindell, has a very colourful history, having grown from a golf / country club to insurance claim outsourcer with a market capitalisation exceeding £2bn, before basically imploding following a short report back in 2014 and various issues, background here, here. Fast forward to today, all operating business has ceased, the various legal claims and regulatory investigations have settled down apart from the following remaining claims:
Claim against PricewaterhouseCoopers for £63m plus interest and costs, this is a live trial now in the London Commercial Court;
Claim against Aviva Canada, scheduled for January 2024;
Attempt to recover VAT paid in the ingenie business.
The £63m claim against PwC is a startling figure set against Watchstone’s £14m market capitalisation, especially as their current cash position is c£14m.
This post is NOT pitching Watchstone Group Plc as a long idea, it is merely sharing thoughts & research into an interesting situation.
Thanks for reading Upside Downside Capital! Subscribe for free to receive new posts.
Capitalisation & Cash
The following table explains the approximate market capitalisation, cash position at y/e 2022, then a further year of costs for 2023 are included to estimate a distributable figure for shareholders:
Note, the trial against Aviva Canada is not until January 2024, however theoretically management should evaluate future costs incurred vs expected benefit, and consider whether to continue or not.
In July to August 2021, 30% shareholder Polygon Global Partners LLP made an offer to buy the company, starting at 34p / share, and the final offer was 38p / share. This was a mandatory offer they were required to make as they crossed the 30% shareholder position. A key development since this point is the KPMG LLP settlement in Nov. 2022.
Potential Upside / Downside Scenarios
This is a simple situation to model but there are a few points to be aware of:
The CEO is entitled to 5.43% of any distribution to shareholders above a set hurdle (which has already been surpassed).
CEO has been paid c£1.2m / year for 2020 & 2021, excluding distribution incentive scheme, but inclusive of bonus. Historically this has been justified by the company as being fair given the unusually high level of risk of being involved with a company with so many issues, however I am not convinced it is a reasonable level now given the very limited activities of the company. The high salary / bonus may also thwart the purpose of the distribution incentive scheme now, as it may encourage pursuing claims with dubious value rather than wrapping up the company.
People costs approx. £2m / year (including CEO).
Legal costs approx. £1.5m / year.
It is unclear what the value of the Aviva Canada claim is and I do not know the chance of success, this has been excluded. Further the company has already lost the First Tier VAT Tribunal, and while they are appealing I do not include any value for this.
Thus focussing solely on the PwC claim, we can estimate upside & downside as follows:
PwC Claim Insight from Trial
The basic claim is that PwC divulged confidential information (particularly regarding Watchstone’s cash position, and when they would run out of cash) to Greenhill who were advising S&G. It is alleged that S&G then used this information to drive down the price they paid to acquire Watchstone’s Professional Services Division saving £63m (paid £637m vs alleged would have paid £700m), further information can be found in RNS, and FT article.
I attended the Commercial Court in London to hear the opening arguments made by Watchstone, PwC, and S&G, and ultimately was left unconvinced that Watchstone would be awarded anywhere near the £63m claim value, my impression is either they will lose, or end up with a fraction of the amount sought.
Insights about the trial / claim:
Watchstone settled previously with S&G, in a related case where S&G sued trying to get some of the purchase cost of the Professional Services Division refunded (it appears to have basically turned out to be worthless). As part of this settlement Watchstone are indemnifying S&G, and further can’t go after Greenhill. This introduces a weird dynamic, because the crux of the claim is that S&G benefitted from being able to pay £63m less for the acquisition, yet Watchstone would like PwC to pay. To me it is S&G that has primarily benefited (from the alleged misconduct of PwC & Greenhill), and thus even if the judge finds against PwC there seems a decent possibility that a substantial portion would be for S&G to pay … who have been indemnified by Watchstone.
A key piece of evidence is Mr Davies (Greenhill investment bank executive at the time) email following the meeting with PwC. However, the judge questioned whether this can be relied upon given Watchstone are alleging that Mr Davies acted in a low integrity manner partaking in this meeting i.e. if you allege he is untrustworthy then how can this evidence be relied upon. It is also odd that Mr Davies is not being called as a witness, it seems this is driven by the prior settlement and Watchstone not being allowed to go after Greenhill.
Unclear if the email summary by Mr Davies was ever sent to S&G, there is an email saying “I didn’t get to send” which does look weird / like a potential cover up, but this would be hard to prove.
PwC are painting Mr Davies as having strong views on the weak cash position at Watchstone prior to the PwC meeting, and appear to have evidence to back up this perspective. Potentially at the meeting what could have happened is Mr Davies said cash will run out mid 2015, Mr Green says won’t run out before deal completes. Mr Davies takes this as confirmation / saying will run out just after, but actually is in line with Dec. 2014 RNS saying “that the Group's resources are sufficient to deliver on management's current plans”. Further the judge seemed to view mid 2015 / 6 months away as not quick enough for S&G to use as pressure anyway.
Only one S&G document has “PwC intelligence” phrase, this was part of a board pack, but it is a single bullet point with no explanation around it, hard to say how significant this is. The phrase “PwC intelligence” was used in Greenhill document with information under it, including controversial information regarding Watchstone’s cash position - however it is unclear if S&G ever saw this document.
NIHL (noise induced hearing loss) cases were incredibly hard for S&G to value, given only 8 had been settled, and they were acquiring thousands of cases. As such, all offers had only contingent consideration for the NIHL business, apart from one which Watchstone proposed. If we put aside the NIHL business and focus on the main part of the business sold, it appears that Watchstone secured nearly all of the value they were after. Apparently the first offer from Watchstone (Mr Currie) was for £650m (+ NIHL £100m contingent), and the actual sale was for £637m (+ 50% share of NIHL profits).
Watchstone tried to argue that the valuation for the main part of the business was 6x EBITDA, and that with the final model EBITDA of £118m this results in over £700m. However, my understanding is that S&G originally offered £600m being 6x £100m EBITDA modelled, they then revised the modelled EBITDA higher to £118m in order to support increasing their offer, but clearly are not going to offer £700m when Watchstone’s original asking price is £650m (excluding NIHL).
Note, for simplicity I have referred to Watchstone above, but trial documents etc will often reference Quindell as they were called at the time of the events.
This is a very interesting situation, where a tiny listed company with net cash approximately matching their market capitalisation could in theory be awarded multiples of their market capitalisation in damages next month. However, and disappointingly, my insights from attending the opening arguments of the trial against PwC, lead me to think they will either lose or only achieve a fraction of the amount sought. Further, the company is potentially spending c£3.5m / year on people & legal costs, and while this may reduce especially post PwC trial, this may erode value over time (Aviva Canada case is early next year; unclear how long HMRC VAT appeal will take; will the Watchstone / PwC trial outcome be appealed). I am NOT pitching this as a long idea, but am sharing thoughts & research into an interesting situation.
No position in Watchstone Group Plc at time of posting.
This post is NOT investment advice & may contain errors. No allegations are made as part of reporting / commenting on the legal cases.
Thanks for reading Upside Downside Capital! Subscribe for free to receive new posts.