Quindell PLC (LON:QPP) shares are down 11% in trading today after a Financial Times article raised doubt about an important joint venture with RAC called Connected Car Solutions which has apparently hit a snag as the two sides try to renegotiate the original deal that was announced earlier this year.

Quindell Plc QPP
Quindell Plc QPP

RAC warrants for Quindell PLC (LON:QPP) stocks now seem overpriced

Quindell PLC (LON:QPP), which bills itself as an IT firm but has been moving aggressively into legal services and processing insurance claims, announced in April that it would install 2 million black boxes at a pace of 50,000 per month in partnership with RAC, a wholly owned subsidiary of The Carlyle Group that mostly offers auto insurance in the UK. Like other companies aggressively pursuing growth, Quindell is using stocks and warrants as part of its deals, and it gave RAC the right to purchase 250 million shares after that cross £0.50 per share. After the recent 15:1 stock consolidation those warrants now require the stock price to pass £7.50 within the next two years.

That probably looked reasonable when the stock was trading north of £5.00 (in post-consolidation terms), but now that it’s hovering around £2.00 and gathering short interest, RAC has to reconsider how much value it places in the warrants. Ironically, whether RAC pulls out of this deal will have a considerable impact on how high Quindell PLC (LON:QPP) stock goes in the near term.

Doubts over RAC JV mean both of Quindell PLC (LON:QPP)’s big businesses could be in trouble

Technically an IT outsourcing firm, the FT’s Dan McCrum has been arguing that it helps to think about Quindell PLC (LON:QPP) as a large public law firm, since that accounts for such a large part of its revenues and projected growth. The risk to investors is that accruals from its legal services, profits that it expects to get but doesn’t actually have in hand, have grown at an explosive rate and founder Rob Terry needs to turn some of those accruals into cash soon to keep investors happy.

But that’s actually the second largest source of Quindell PLC’s (LON:QPP) projected revenue: Connected Car Solutions is that first. Short sellers like Gotham City Research and Coatue Management can now point to potential problems at both of Quindell’s big businesses, and the market has already responded.