BVR Logo 5 April 2022 | Issue 37-1

BVWire—UK is a free service from BVR focusing on the business valuation profession in the United Kingdom. We offer news and perspectives from valuation thought leaders, the High Courts, HMRC, the standard-setters, ICAEW, RICS, IVSC, and more.

Please be in touch with your perspectives, news, and ideas—and pass this issue along to colleagues (complimentary sign-up instructions are here).

Can you apply the market approach when valuing crypto?

“Factors impacting the price of a digital asset include supply and demand, number of competing digital assets, cost to produce the asset through mining, rewards issued to miners for verifying transactions to the blockchain, regulations governing sale and use, internal government, and news,” say the authors of a new paper, “Digital Asset Valuation.”

The paper’s authors, Wulf A. Kaal (University of St. Thomas, Minnesota—School of Law), Samuel Evans (PricewaterhouseCoopers LLP), and Hayley Howe (Emerging Technology Association), conclude: “The industry would benefit from uniform standards for digital asset valuation.”

Of particular concern, they argue, is that crypto exchanges are less liquid than traditional exchanges. They have fewer offerings, and the “number of token holders have not continued to expand exponentially.” In effect, this means that crypto assets are thinly traded. So market pricing, when available at all, overstates unrealized gains and fair value. Bitcoin might be priced at £38,000—but significant stakeholders could never sell at that price.

“Factors impacting the adoption, success, and price of digital assets that are unique from traditional assets include technical core (blockchain native, ERC-20, Dapp, etc.), token model (currency, stablecoin, utility, asset-backed, etc.), underlying value (inherent, permission to use, permission to work, physical asset, share in enterprise), valuation trajectory (inflationary or deflationary), user experience, ecosystem breadth, consensus protocol, and governance,” the authors say.

Kaal, Evans, and Howe recommend alternative market approaches to contend with blockage and liquidity issues, including the:

  • Use of secondary trade or comparable token pricing data;
  • Application of discounts for lack of liquidity when trade history is lacking or unreliable; and
  • Use of newer market approaches such as network utility usage or minimum network value.
Now’s the time to preorder the 2022 Mergerstat Review

The annual Mergerstat Review delivers comprehensive rosters, data, and statistics on global merger and acquisition (M&A) transactions including all the top UK deals. All the largest privately held, publicly traded, and cross-border transactions are reported and ranked. In addition, the Review is a trusted source for control premiums by year—and industry multiples.

Preordering for the 2022 edition is now available at the BVR bookstore. Print and digital versions of all previous annual publications are also available.

Data for each annual edition are sourced from the prominent FactSet Mergerstat global mergers and acquisitions data—and all of it is verified by expert analysts. Financial professionals in every sector anchor their M&A research with the annual Review.

The purchase also includes the Mergerstat Monthly Review—an update on M&A activities, trends, and deal data by industry. The Monthly Review reports, for instance, the top international deals from last month (total deal volume was down nearly 38% over last year), which were:

  • The Toronto-Dominion Bank’s agreement to acquire First Horizon Corp. for $13.3 billion;
  • A private group led by Apax Partners Inc. and Iliad offered to acquire Vodafone Italia SpA from Vodafone Group Plc for $13 billion; and
  • Celanese Corp.’s deal to acquire an undisclosed majority stake in DuPont de Nemours Inc.’s mobility and materials unit for $11 billion.
Expenses for share options to UK employees can be tax deducted, despite HMRC objections

In Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another EWCA Civ 663, the UK Supreme Court ruled last month that future cash-flow projections can continue to include the tax benefits of restricted stock expenses, as is the current practice for most UK business valuations.

The Supreme Court was asked to consider whether accounting debits relating to the grant of share options to employees are a deductible expense for corporation tax purposes. The appeal of this decision was heard in late January.

The taxpayers were wholly-owned subsidiaries of a holding company, Smith & Williamson Holdings Ltd (SWHL). In 2003, SWHL settled an employee benefit trust, which gave employees a contractual right to acquire shares in SWHL for a specified price. When options were granted, SWHL recognised a monthly charge to group companies equal to the fair value of the options, pursuant to International Financial Reporting Standard 2 (IFRS 2). SWHL then reduced their trade profits accordingly for the purposes of corporation tax.

This worked until HMRC refused the corporation tax deduction and issued “closure notices” disallowing the deductions.

Now, business valuation experts can continue to treat the issuance of share options to employees as an expense for tax purposes in both current and forecasted periods, which may reduce trade profit projects.

Can you risk using ESG data in your UK valuation reports?

“The IVSC’s new ESG Working Group feels that it is important to carry out a survey of investors, firms, and valuers to understand where they are on their journey in relation to the quantification of ESG components within their valuations. Within valuation, no explicit standards exist,” says Alex Aronsohn, IVSC technical standards director (tangible assets). To take the ESG and business valuation survey, and receive the results, click here.

The survey forms part of a broader programme of activities linked to ESG and valuation. The Working Group has issued a survey of investors, businesses (as users of valuations), and valuers.

The ESG survey will run through April, and survey respondents can register to receive a report of the findings, which the Working Group will issue later this year.

Just when you assumed overpricing couldn’t increase, PE ups the ante, Dechert partners argue

Dechert is involved in many of the largest UK deals, so it’s worth listening when four of their leading finance partners (Jonathan Angell, John Markland, Daniel Hawthorne, and Thiha Tun) comment on a new trend. In a recent article for Lexology, the four imply that PE pricing, driven by continued cheap debt, has finally priced out the rest of the market. That’s certainly the case in the three largest recent transactions in the UK.

The authors refer to the two largest recent transactions in the UK as evidence for their claim:

  • The £6.7 billion all-cash offer by a consortium of PE funds, led by Fortress, for WM Morrison Supermarkets PLC. “This sequence (including G4S, John Laing Group, TalkTalk, and Sanne Group) has caused some (politicians and trade unions being prime examples) to label the current market as ‘UK for sale,’” the authors say; and
  • The sale by Cerberus Capital Management of Covis Pharma, a global specialty pharmaceutical company (and, therefore, a large, cross-border transaction), to Apollo Global Management Inc.

“There has been competition on PE exits from rival potential buyers, both trade and PE, with PE firms frequently willing to increase their pricing to match or outbid trade, or (at least) to compete aggressively on price, taking advantage of both the equity funds at their disposal and the favourable debt markets,” say the Dechert partners.

New claims processing requirements for R&D tax reliefs could impact future value

The HM Treasury outlined new provisions of the United Kingdom’s research and development (R&D) tax relief system in their December 2021 report, with emphasis on providing more tax incentives for investments and innovation undertaken in the United Kingdom. Draft legislation is expected by the end of the summer.

Because of labour, regulation, and skill shortages, certain research activities in the life sciences, and software and data licencing sectors will still receive full credit. Currently, there is no requirement that R&D activity must be conducted within the UK to be eligible for tax reliefs.

All R&D tax reliefs claims must be endorsed: The December report also attempts to curtail abuse by requiring greater detail for all claims, as well as digital endorsement by a named senior executive of each company. This requirement could add costs (and reduce value) for startups and SMEs.

Valuation independence: plan early to avoid advocacy

This is one of the tips in an article from the latest journal of the Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organisation (VPO) and standard-setter. When valuers first meet with attorneys, they often get a sense that they will be “pushed” to provide a conclusion in one direction or another. How to respond is the subject of “Tips to Help You Avoid Blurring the Line Between Impartiality and Advocacy,” by Andrew Cochran (EY), Shaun Laubman (Lax O’Sullivan Lisus Gottlieb), and Lindsay Campbell (Hoare Dalton Litigation and Valuation Services), in the Journal of Business Valuation, 2021 edition. The Journal is published by the Chartered Business valuators Institute (CBV Institute) of Canada and is now available on the BVResearch Pro platform.

The authors say that, while most “understand that their duties as advocates differ from yours,” if you get the feeling that “you might be pressured from a lawyer you have not worked with before, we would encourage you to do some research on their past cases to see if you’d be comfortable taking this case.”

Dates for your diary

5-8 April: ASA’s Valuation of Intangible Assets, virtual course.

12-20 April: ICAEW Practical Business Valuation, virtual classroom. Repeated 21-29 June.

27-28 April: RICS UK Valuation Conference 2022, virtual

15 June: Society of Shares & Business Valuers’ Minority Interest Discounts With Sandra Mossios, London, 5:30 p.m.-7 p.m.

9 July: Society of Shares & Business Valuers’ The Absence of Size Effect With Clifford Ang, London and virtual, 5:30 p.m.-7 p.m.

13-15 September: IVSC Annual General Meeting, Fort Lauderdale, Fla.

3-5 October: 12th Annual International Valuation Conference, Riyadh, Saudi Arabia

19 October: Society of Shares & Business Valuers How to Lose at the Tax Tribunal With David Bowes, London and virtual, 5:30 p.m.-7 p.m.

7 December: Society of Shares & Business Valuers’ Causation and Financial Losses: Factors to Consider With Prem Lobo, London and virtual, 5:30 p.m.-7 p.m.

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