BVR Logo 18 August 2020 | Issue 17-2

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, 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).

Advising clients on the meaning of ‘fair value’

The phrase ‘fair value’ continues to bedevil the high courts and create very different expectations when parties are forced to figure out what to pay when buying and selling. That’s the premise of a thoughtful analysis on the current meaning of fair value by Chris Brierley, legal director at RDC (London). In ‘Calculating Fair Value—Is It Really Fair?’ Brierley looks at the new Shanda Games Ltd v Maso Capital Investments Ltd Privy Council decision, which highlights the ongoing confusion.

‘The case arose as a result of Shanda Games Ltd (Shanda), a Cayman Islands company, merging with Capitalcorp Ltd, as part of a transaction to take Shanda back into private ownership and remove its listing on Nasdaq,’ writes Brierley.

Maso, a minority shareholder in Shanda, objected to the merger price in accordance with Cayman Islands company law. This law provides that an objecting shareholder can apply to the Grand Court in the Cayman Islands for a determination of the fair value price.

Unfortunately, in this case, the decision escalated from the Grand Court to the Court of Appeal of the Cayman Islands and finally on to this decision by the Privy Council, the ultimate court of appeal for the Cayman Islands comprising five judges from the UK’s Supreme Court.

Brierly argues that ‘typical assumptions’ guide the courts about the meaning of fair value. Unfortunately, ‘the inclusion (or not) of a particular assumption can drastically alter the amount paid as “fair value,” as was seen in the case of Doughty Hanson & Co Ltd v Roe decided by the High Court in England in 2007,’ he says. Still, when business valuers advise clients, they can improve clarity by referring to those assumptions, which Brierly summarises as:

  • That the sale is on arm’s-length terms between a willing seller and a willing buyer;
  • That the sale is of all the shares in the company;
  • That the company is a going concern (provided that it is a going concern at the date of determination);
  • The date on which the valuation will be made;
  • Disregarding whether the shares being valued represent a minority or majority interest or, alternatively, considering what value would be paid for the shares if there had been a sale of all of the shares and the proceeds had been allocated through the distribution ‘waterfall’ in the articles (i.e., where different share classes are entitled to different amounts of any sale proceeds); and
  • That the shares can be transferred without restriction and are not subject to any encumbrances.
What’s control worth in the UK? A
current example

Sources such as BVR/FactSet’s Control Premium Study (CPS) often support price premia above 25% as the assumed benefit of a controlling interest. We’ve seen an interesting current example of this principle the last two weeks in the largest listed company transaction this year: Finnish insurance group Sampo Oyj’s potential cash bid for London-based general insurer Hastings Group Holdings Plc. Sampo and Hastings share the same largest shareholder, Rand Merchant Investment Holdings Ltd.

Sampo Oyj has approached the London-listed insurer about a possible cash offer, according to a statement Wednesday confirming an earlier Bloomberg News report. Hastings is in talks with the consortium and has formed an independent board committee to consider any deal, it said in the statement.

Bloomberg News reported the bid two weeks ago, and shares of Hastings rose as much as 20% that day. While this increase was a one-day record for Hastings, it reflected a lower control premium from the market than usual, which is typically the case for insurers with their perceived performance and risk characteristics.

Over the next few days, the increase has averaged between 10% and 15%, putting Hastings’ control premium at about £200 million.

PwC valuation team completes restructuring deal for Travelex

PwC’s engagement to calculate the fresh capital needed to keep the remainder of ailing Travelex afloat has been completed with an agreement to provide £84 million. The currency exchange group started 2020 in trouble after their closure as a result of a cyberattack in January. Now, with a strong emphasis on airport currency exchange, and limited retail sales, the company has restructured.

The Financial Times quotes PwC administrator Toby Banfield as saying, ‘Unfortunately, as the majority of the UK retail business is no longer able to continue trading, it has regrettably resulted in 1,309 UK employees being made redundant.’ PwC also referred to COVID-19 and the New Year’s Eve cyberattack as factors.

Travelex will maintain approximately 1,800 jobs in the UK, the agreement says.

D&P’s de Gray releases new financial damages guide for lost value calculations

Neil de Gray, a director in the Toronto office of Duff & Phelps, makes a strong argument for the use of business valuation professionals in any calculation of damages in his new guide The Financial Damages Model for Loss of Value, published late last month by Lexology. The lengthy summary offers ‘an overview of business valuation principles, concepts and methodologies, and … how they apply to the calculation of damages’ despite the lack of consistently applied valuation formulas.

Much of the background will be familiar to BVWire—UK readers, including his summaries of damages principles such as highest price available, willing buyer and willing seller, no compulsion to act, common knowledge of relevant facts, and an arm’s-length transaction in an unrestricted market. Still, de Gray’s summary of these factors, and the underlying business valuation principles, are clear, complete, and helpful to any expert involved in these contentious cases.

After reviewing asset-based and DCF methods, de Gray compares valuation benchmarks for the market-based valuation methodologies often used as secondary sources, and challenged by the courts in the UK (and elsewhere). His primary examples of valuation benchmarks include:

  1. Enterprise value-to-EBITDA multiple—calculated as enterprise value divided by EBITDA;
  1. Enterprise value-to-revenue multiple—calculated as enterprise value divided by revenue;
  1. Price-to-book-value ratio—calculated as the public-market capitalisation of the company divided by the reported net book value of the company; and
  1. Price-to-earnings ratio—calculated as the public-market share price divided by the earnings per share.
de Gray agrees that market approaches can introduce subjectivity into any business valuation and that ‘some ratios are more relevant to one industry than another,’ but, when used with sufficient professional judgement, they offer guidance to lost value calculations.

IVSC confirm dates for next annual meeting and advisory forum meeting

The IVSC’s Advisory Forum Working Group (AFWG) is inviting representatives of IVSC member organisations to join their meeting on 28 September.

The AFWG has played a key role in shaping the work of the IVSC and informing the development of the International Valuation Standards (IVS). The Working Group generally meets monthly and is comprised of leading valuation professionals and experts from a number of the IVSC-member VPO organisations.

To register for the advisory forum meeting, please email the IVSC.

In addition, the IVSC’s Annual General Meeting is set for 5-12 October and will host virtual panel sessions on topics including:

  • Trends shaping valuation in retail real estate;
  • The growth of internally generated intangibles and the impact on business valuation;
  • Valuation and the evolving role of the CFO; and
  • Geopolitics, investment, and the macroeconomic outlook.

These virtual sessions bring together international experts with a range of perspectives on some of the most pertinent topics facing the valuation profession. Attendees will also be invited to join IVSC board meetings and the AGM itself.

Sunak’s FinTech growth plans are now the subject of an independent review by HM Treasury

HM Treasury announced the relaunch of an independent review of the UK’s FinTech sector last week. Ron Kalifa OBE will chair the review.

This in-depth look at the sector comes after much public discussion and is in direct response to Chancellor Rishi Sunak’s budget, which anticipates continued UK leadership of this sector globally.

‘We are confident that this timely and important review will underpin the future growth and prosperity of the sector across the whole of the UK, and we firmly believe this announcement is a real recognition of our collective work to provide strategic direction to the sector,’ said Charlotte Crosswell, CEO of Innovate Finance, in the announcement. Innovate Finance, along with the City of London Corp., will provide secretariat services for the review.

The review hopes to help counter the negative impacts of Brexit and COVID-19 and ‘expand skills and talent available for the sector; improve access to capital funding and investment; connect our national and regional FinTech hubs; analyse our approach to policy and regulation for the sector; and thereby ensure that we remain competitive and attractive on the global stage.’ Webinars and roundtables are currently being scheduled so that financial professionals can provide input to the process.

Dates for your diary

20-21 August: ICAEW Excel Modelling—Investment Appraisal, Valuation and Business Cases, virtual, 9:15-12:30 BST both days (repeated live 30 October and 4 December)

9-11 September: BVR/AAML Virtual Divorce Conference, virtual event

28 September: IVSC Advisory Forum Working Group public meeting, virtual event

5-12 October: IVSC AGM 2020, virtual event

11-13 October: American Society of Appraisers International Conference, virtual event

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

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