Inactive markets, short time scales, cash-flow constraints, and potential damage due to public knowledge of financial distress may all have increased impact on ‘going concern’ valuations.

COVID-19 has had an impact, of course. It’s decreased the financial strength of many classes of dissenting creditors, making them more fearful of secondary alternatives such as liquidation. The other reason is the UK’s new Corporate Insolvency and Governance Act 2020 (CIGA), which introduces restructuring plans and new ‘genuine economic interest’ factors to the process.

A fantastic summary of the new issues was released last week. It’s the work of PwC UK partners Kellie Gread and Mike Jervis, and Director Adam Sutton. In ‘Act Now to Recover: Valuations—The New Old Battleground in Restructuring,’ the authors agree that everyone involved in any insolvency proceeding will be looking directly at the cash runway and whether ‘there is a sufficient cash runway to give the company time to engage in a market testing process’ rather than taking steps that could be ‘value destructive.’

There’s always a strong desire for creditors—and dissenting creditors—to argue for the highest yielding alternatives. This PwC analysis argues that valuers and their senior lender clients who argue for liquidation value will ‘need to be supported with more objective evidence of asset discounts, backed by commercial judgement and experience rather than rough rules of thumb.’

Discounted cash-flow valuations used to support the new restructuring plans under CIGA will be challenged, as will the business plans that support them. As the authors conclude, ‘if the ability of a company to survive after restructuring is in serious doubt, the Restructuring Plan may be called into question, allowing creditors to push a company toward liquidation.’ PwC projects that valuers will need increased industry expertise, a convincing set of multiple scenarios, and a wider range of sensitivity analyses to withstand these pressures.

They also make some wise observations:

• Valuers will not be able to ‘park’ increased uncertainty—this must be reflected in the cash flows and terminal value conclusions;

• Macroeconomic conditions will be even more important in valuing an RP; and

• Market multiples and transaction values can still provide ‘important alternative valuation methods.’

Our thanks to Marianne Tissier for highlighting this helpful PwC analysis for BVWire—UK.

A Russian supply-chain business owner was awarded US$58 million in damages—until the English High Court and judge Sir Ross Cranston reviewed the maths. The London Court of International Arbitration (LCIA) panel had, apparently, added the value of historic tax liabilities, rather than subtracting it. While the correction reduced the damages to US$4 million, the panel did not change the award, arguing that, despite the analysis mistake, the original amount was fair.

The High Court disagreed in Doglemor Trade v Caledor Consulting [2020] EWHC 3342 (Comm).

Valuation was already a problem before the computational error was introduced. Doglemor had engaged Benjamin Sacks, and Caledor hired Philip Haberman. When the LCIA agreed on the award (in January 2020), Caledor’s experts argued the shares in question had a value of US$174 million. Meanwhile, Doglemor claimed that the 30% call options were worthless. The arbitrators concluded US$118 million.

It was then that the Doglemor side pointed out the ‘mistake resulting from its failure to make a deduction through overlooking the instruction in the agreed valuation model to enter the tax liabilities figure as a one to be subtracted rather than added.’ This correction, they argued, reduced the damages dramatically—to US$4 million. LCIA admitted the error but said the award should not be corrected.

The LCIA’s analysis and High Court’s decision are of particular interest to business valuers because they include lengthy discussions of the business valuation methods and results. Highlights include descriptions such as:

• Both experts used the discounted cash flow method as their primary method of valuation but ended with strikingly different enterprise value conclusions;

• The Tribunal was particularly interested in the valuers’ assumptions about EBITDA margin (Mr. Sacks used a 7.1% margin whilst Haberman chose 13.5%); and the appropriate WACC (again, Sacks used 10.9%, and Haberman chose 15.5);

• Neither the LCIA nor the High Court valued market comparables to support the DCF assessments; and

• The Court expressed concerns about applying ‘mechanistic or arithmetical’ approaches to normalisations of the income statements.

RICS is examining the values required to meet professionalism standards and has released ‘Time to Reinforce Our Core Values,’ an opinion piece by Michael Zuriff, head of regulation, Americas, for the Royal Institution of Chartered Surveyors (RICS). ‘The pandemic and the subsequent economic slowdown place a greater emphasis on the need to trust the work of professionals,’ he says. RICS has opened a consultation on proposed revisions to its Rules of Conduct, which have been in place since 2007. The consultation is available if you click here.

Incidentally, IVSC are in the process of issuing a list of ‘14 values,’ which will be subject to public review after their release early in 2021, after which they may be included as an IVS update. More on that in BVWire—UK later.

17 December: Transfer Pricing: 2020 Year-End Considerations, a Lexology webinar with Mark Alms, Alvarez & Marsal, 14:00 BT

21-22 December: Excel Modelling—Investment Appraisal, Valuation, and Business Cases, virtual

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