Controversy continues at Quindell

Quindell (QPP) the Software, Consulting and Technology outsourcer issued another RNS this morning connected with more detail on the directors recent deal with Equities First Holdings (EFH) which caused the shares to drop as low as 88p, a 25% fall. They are now trading at 103p with some huge volatility.

The price has dropped on the revelation that “Under the Agreement, which is a sale and repurchase agreement intended to provide financing to the Purchasing Directors, the Purchasing Directors transferred the legal and beneficial interest in a number of shares to EFH (the “transferred shares”) in return for the Purchasing Directors receiving a payment from EFH of a sum equal to 67 per cent of the three-day average market value per share less a financing arrangement fee of 3 per cent.”

In effect the directors including Chairman Rob Terry had sold shares to EFH at a price significantly below market price i.e. they have transferred shares and received some money. However, it is also interesting to note that “On the maturity date of the Agreement (two years from the payment of the EFH Purchase Price), the Purchasing Directors are contractually obliged and have informed the Company that they fully intend to, purchase the transferred shares or equivalent shares from EFH at a price equal to 69 per cent. of the three-day average market value per share applicable at the date of entering into the facility, less margin calls paid, and EFH is required to deliver the transferred shares or equivalent shares to each Purchasing Director on payment.” This means that the directors need to purchase the transferred shares at the end of the 2 year term at an equivalent price to what they sold them to EFH.

Furthermore Rob Terry says in the RNS that “As previously stated and as demonstrated by the initial purchases made by the Purchasing Directors and the fact that the majority of the board has acquired shares recently, we believe the current market valuation of the Company is materially below its true value. In entering into the sale and repurchase agreements to provide finance, each of us Purchasing Directors relied upon assurances from EFH that, notwithstanding EFH’s legal rights, the custom and practice of EFH was that the shares transferred would not be disposed of outright, other than in a default event and will be held by their custodians throughout the term of the agreement, nor would they engage in short selling activity.

We have made this further announcement to ensure the market is aware of the actual number of shares transferred to date under the Agreements.  Further announcements will be made when more shares are to be used to fund further purchases of Quindell shares in the future.  For clarity, purchasing shares at the current valuation has been the motivation for entering into the Agreements. The Agreements are purely to provide funding for a two year term and I and Laurence intend to use the funds received under the Agreement to purchase Quindell shares and to cover any associated potential tax liabilities and margin calls relating to the Agreements, with Steve Scott intending to do the same and also cover certain other tax liabilities. The Agreements would not have been entered into if the board did not remain confident of meeting full year market expectations and of the Company’s longer term prospects.”

With the comment that “The Agreements would not have been entered into if the board did not remain confident of meeting full year market expectations and of the Company’s longer term prospects”, the board clearly expect to be issuing positive trading updates and for the full year 2014 figures to be strong. It seems unfortunate that the three board members Terry, Moorse and Scott seems to have entered into such a controversial and opaque agreement with EFH but the RNS is clear that the money raised is being used to purchase additional Quindell shares (and not for any other purpose apart from margin calls) at what they believe are low levels. EFH also can’t short the shares.

I for one would have believed that given the board comments in the RNS re. expected results and market expectations and the intention to fund share purchases the shares look undervalued at less than £1 despite the obvious risks. If they fail to deliver on the results, it would be a blatant untruth. Furthermore shorter Roble seem to be reducing their position given recent FCA data and this morning’s mass sell off gave them an excellent opportunity to buy back more shares to cover their shorts. With Terry and his crew being able to buy several million pounds more shares, now a transparent and clear trading update needs to be issued – certainly no smoke and mirrors. If cash flow is the key question every shareholder wants to see clarity on this issue and also the company’s intentions in terms of divestments and its market listing strategy after the failed attempt to get on the FTSE main market. AIM is a casino at times (and much too often for my liking) and Quindell seems to be doing no one but the shorters any favours at the moment in terms of its actions, but unless there really is massive fraud at the company as some suggest then the share price seems ludicrously low. If a fraud was being committed I would have thought you would have seen some director departures as the rats leave a sinking ship, but far from it with both execs and non-execs buying shares in the face of a collapsing share price. Either an amazing money making opportunity or doomed and if it is the latter then Rob Terry and the board can expect long jail terms. The sell off seems overdone given the facts available right now but with Quindell you never quite know! I couldn’t resist buying a few but I expect a roller coaster ahead, more fool me!

Contrarian Investor UK

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