can the legal services business become a magic circle business?

Last week’s warning from Knights Group Holdings (LON:KGH) of lower-than-expected earnings is another blow to the acquisition-hungry legal services firm. The shares fell 50% from 365p to 181p, then continued to fall to 143p as the week progressed. This week stocks have rallied slightly, with shares now trading at 164p.

Knights now expects to generate revenue of around £126m with pre-tax profits of around £18m for the year ending April 30, 2022. There were no losses. large numbers of customers or employees and the group said the reason for the slower growth was due to higher rates of illness among staff and a slowdown in business work.

This is particularly disappointing as Knights had a promising first half of 2021 and spent much of last year focusing on pricing – looking at billing rates, improving recorded time recovery. As a result, H1 2021 revenue increased by 29% to £59.7m (H1 21: £46.2m), with organic growth contributing around 9%, equating to around 4, £4m. Revenue from acquisitions also increased by £9.1m in the first half. Pre-tax profits rose 26% to £7.6m from £6.0m in the same period last year.

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The acquisition of Langley

The second set of bad news came a day or two later with the completion of the acquisition of Langley Lawyers. Earlier this year, Knights announced the acquisition of the York and Lincoln-based company when Knight’s share price was around 400p. However, by the end the share price had fallen to 143p. As a result, the £2.75 million Knights would have issued in new ordinary shares is instead to be paid in cash in three equal installments on January 2, 2023, January 2, 2024 and January 2, 2025.

Colin White, legal expert and head of mergers and acquisitions at Ortus Group, comments on Knights’ earnings warning: “Overall, law firms have performed well this year and although there are still outliers, with Knights’ division of labor and geography, their drop in income can’t be fair to Omicron.

“As for the completion of the Langleys, we are of course all looking from the outside, but it seems to me that they had to offer cash instead of stock in order to close the deal. Did the Knights pay too much? Perhaps. Also, did they have to borrow money to finance the acquisition? »

The magic circle of regions

Knights says the company’s opportunity to take a leading position in key legal services markets outside of London remains significant and it is recent events that are holding back business.

It has certainly risen considerably since its listing in June 2018, having made around 15 acquisitions to date. Among them are Spearing Waite and Cummins Lawyersboth based in Leicester, BrookRue des Roches who is based in Oxford and based in Sheffield Keebles. The company now has offices in 17 different locations with Santander, dunelm and M&G said to be on the client list.

Knights’ USP is that it has corporatized what is traditionally a law firm partnership model. CEO David Beech said they plan to accelerate growth and be the regions magic circle. This means in practice that lawyers will be separated from ownership and management, creating a corporate culture that moves away from teams and offices competing with each other.

“It is easy to criticize the corporatized model when we look at the traditional prism of legal practice. But if they’re still making money and building a legacy business that has value, it’s up to shareholders to decide if it works,” White adds.

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