Bankruptcy court disqualifies ‘maverick’ DCF analysis

BVWireIssue #51-1
December 6, 2006

Just last week a federal bankruptcy court in Delaware (In re Nellson Nutraceutical, Inc.) precluded the valuation report of a qualified expert, primarily because in his discounted cash flow (DCF) analysis, he’d used a measure of EBITDA minus Cap Ex (capital expenditures) to determine terminal value. The court said:

[W]hile EBITDA minus Cap Ex is used as a ‘credit statistic’ to measure, among other things, whether a company can adequately service its debt, it has never before been used by any expert before any court in the United States to determine a company’s terminal value under a DCF analysis.

Therefore, Judge Sontchi found the untested, unprecedented method to be unreliable pursuant to Daubert and its increasing progeny—including the recent In re Med Diversified bankruptcy opinion out of New York (see BVWire #47-4). And similar to that case, the Nutraceutical court had first qualified the expert to testify under the federal rules—and then struck his report after trial—for its use of “maverick” methodology. For a copy of the full-text court opinion, click here.  

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