Shares in insurance outsourcing firm Quindell (LSE: QPP) opened almost 40% higher this morning, after the firm said that its legal services division could be sold for a significant premium to the companys market capitalisation on Friday, which was around 330m.
Exclusivity extended
The news relates to Quindells previously disclosed discussions with Australian firm Slater & Gordon, regarding the possible sale of its professional services division. This division accounts for around 85% of Quindells revenue and a similar proportion of profits.
Quindell currently has an exclusivity agreement with Slater & Gordon regarding any potential deal, and today said that this exclusivity period has been extended until 31 March 2015.
How much is it worth?
According to Quindells latest market update, the indicative terms being discussed with Slater & Gordon imply that the sale price of the professional services division could be at a significant premium to the firms closing market cap on Friday, which was around 330m.
A report on the This Is Money website over the weekend claimed that Slater & Gordon is currently considering an offer of around 700m.
Is this realistic?
During the first half of 2014, Quindell reported revenue of 293.3m and earnings before interest, tax, depreciation and amortisation (EBITDA) of 120.7m for its professional services division almost all of which was generated by legal services activity.
If these figures are sustainable, then the rumoured 700m price tag could be realistic. However, Quindells poor share price performance and much lower market capitalisation suggest that the market is not entirely confident that the firm can sustainably generate profits and cash flow at this level.
Smart move
In December, Quindell agreed, at the suggestion of its lenders, to engage auditors PwC to carry out an independent review of the firms main accounting policies and cash flow forecasts.
The results of this review are expected by the end of February, and are likely to be very significant for the firm, as they should either validate or discredit Quindells revenue and EBITDA recognition policies, along with its cash flow forecasts. These are the three main elements at the centre of the debate over the firms valuation.
By extending the exclusivity agreement on a potential deal, Slater & Gordon has ensured that it can delay a decision until the contents of the PwC report are known. This seems a sensible move, in my view, and reflects my own view on Quindell shares.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.