Evil Knievil: Faites vos jeux

Watchstone (LON:WTG) is an investment company awaiting returning to cash in entirety on completion of current litigation. There are 46m ordinary shares in issue and the current price is 80p.

The balance sheet suggests that nav is £46m (and I here decline to write off intangibles of £12m and consider losses if any since 31st December 2018).

£50m is held in escrow pending its release to WTG on resolution of an action brought against WTG by Slater and Gordon (SG), an Australian firm of contingency fee lawyers who bought WTG’s Professional Services Division (PSD) several years ago for £637m. SG allege deceitful conduct by WTG when handling the PSD sale.

Last week, WTG was able to get the High Court in London to confirm the propriety of an action to be brought by WTG against SG for improperly benefiting from information as to WTG’s financial position when WTG was selling PSD. The claim is for £63m.

Provided everything goes in WTG’s favour WTG’s nav will therefore be £159m giving a putative valuation of 345p per share.

The action starts in, say, two months’ time.

There are perhaps three outcomes: (i) SG win and wipe out WTG (ii) SG lose and their claim is struck out (iii) WTG wins its claim of £63m. There are of course many other possible outcomes but for the purposes of this note I have sought to simplify matters.

I think SG will lose since they had many weeks in which to complete due diligence and because WTG’s board cannot possibly have envisaged any benefit to be achieved through deceitful conduct whereas SG’s management and lawyers have every incentive to maintain proceedings.

Accordingly, Family Cawkwell is long WTG pending the final whistle. This is great sport.

(Notes: (i) SG is solvent and its shares stand at A$1.5 on the ASX; (ii) WTG’s former CEO faces charges at the hands of the SFO; (iii) there is no significant dilution of current WTG shareholders in prospect through options.)