Business valuers often ‘tic the box’ on property and casualty insurance policies as part of their management interviews. P&C coverage normally includes some sort of business income replacement or business interruption (BI) policy, and a company without these obvious risk management tools in place might logically have a lower fair market value than a comparable enterprise.

However, the COVID-19 crisis has revealed last-minute efforts by UK insurers to rewrite policies to omit coverage of biological risks such as pandemics. In addition, since most policies only replace lost income (specifically not lost turnover), and many smaller UK companies are currently operating at a loss, business interruption insurance has turned out to be a wasted investment—and hasn’t reduced risk at all.

Income replacement insurance schemes are now garnering more attention than they have in years, particularly because of the legal action against AXA, Zurich, RSA, and others on behalf of small hospitality businesses whose legitimate business interruption claims have been rejected. This follows a first action against Hiscox by a separate group of small-business owners. The big insurers simply say that BI coverage almost never protects against pandemics.

“This is an insurance product that never allows a claim,” one business owner north of London says. For business valuers, it would be hard to argue that a lack of business interruption coverage somehow increases risk, or decreases value.

Private investments in public equities (PIPES) are a little-used financing alternative in the UK, but a new article by Baker MacKenzie London partners Nick Bryans and James Thompson in this month’s International Financial Law Review (IFLR) suggests that need may outweigh the huge cultural and regulatory hurdles. PIPES have only sparingly been used (recently by Aston Martin, for example), ‘principally due to the importance the UK investor community attaches to pre-emption rights,’ the article begins. Main market restrictions at the 15% and 30% investor level for listed companies are problematic, and traditionally the private capital community has demanded antidilution, veto, and other rights that have led issuers to view PIPES as a financing source of last resort.

But, having spent down their revolvers, or facing broader liquidity concerns, Bryans and Thompson told IFLR that ‘a number of factors support [use of PIPES currently]; record levels of dry powder globally are waiting to be deployed; traditional debt markets are facing material disruption as both borrowers and lenders face mounting financial pressure … and valuations of listed companies are currently at a historic low point for companies in many sectors’ and finally, as a result, institutional investors may now be willing to soften their ‘tough stance’ on pre-emption rights.

Should the use of PIPES increase in the UK, business valuers will experience more complexity in assigning values to differing share classes, since, despite the supposed ‘softening,’ large share blocks held by institutional investors are likely to continue to hold significant additional rights. This allocation of enterprise value could be an increasing factor for fairness opinions and goodwill impairment tests, as well as for general audit-related business valuations.

The International Valuation Standards Council (IVSC) has extended the comment period to 30 June for its IVS 230—Inventory Exposure Draft. The valuation of inventory project resulted from feedback received during the agenda consultation process the IVSC conducted in 2017 and 2018, and the Business Valuation Board, with support from the Standards Review Board, has led it. The exposure draft addresses several themes regarding the valuation of inventory, with particular attention to changes in the top-down method. Comments on the draft should be sent to comments@ivsc.org.

Business valuers have stood their corners against changes in valuation methods based on economic crises. Any valuer who worked through the 2008 recession has the advantage of a long view of the economic impact of COVID-19.

Even by that standard, a new analysis by Alvarez & Marsal (A&M), along with Retail Economics, should give cause. While nearly everyone agrees retail is among the industries the crisis has most damaged, the new study concludes:

Modelling by A&M and Retail Economics shows that a 10 percent reduction in sales would have resulted in over two-thirds of major U.K. retailers falling into negative cash flow. But sales are forecasted to have dropped as much as 70 percent since the lockdown was introduced on 23rd March, tipping every retailer sampled into immediate negative cash flow.

Retail was not healthy pre-COVID-19; in fact, A&M found that five of the 34 major retailers already had negative cash flow before the virus struck. Fortunately, the government support programmes have provided enough liquidity so that most of these firms should be able to manage their affairs until at least the end of the initial lockdown period. Erin Brookes, A&M’s managing director and head of retail, Europe, is quoted in the study about what will occur as the lockdown enters the summer, lacking further intervention.

It has already become clear that the high street will take on a very different form once the pandemic is over. Weaker players will, unfortunately, cease to exist, leaving behind a smaller but more resilient sector comprising operators that acted fast. The survivors will benefit from strong trust in their brands, underpinned by fewer experiential stores that drive customer engagement and multi-channel sales.

A&M continues to publish perspectives on valuation issues that will be helpful to most BVWire—UK readers. Besides this analysis of the large retailers, the firm also released Key Concepts in Franchise Restaurant Workouts this month, with leadership input from managing director Jonathan Tibus.

IVSC Annual General Meeting, 14-16 October, Chicago

EACVA 14th Annual Business Valuation Conference, 29-30 October, Munich

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