Abstract
In restructuring contexts, particularly in relation to Restructuring Plan relevant alternatives and Scheme comparators, it is common to see discounts applied to valuation estimates derived on the basis of the conditions of an orderly sales process. These discounts are often material and consequently can have a significant impact on the valuation conclusions. It is therefore essential that the valuer is able to clearly articulate the circumstances of the sales process envisaged and how it deviates from the conditions of an orderly sales process.
In this context, we set out a summary of the key factors to consider when forming a view on an appropriate discount, examine a selection of discounts previously used by valuers, and summarise the skills and experience of relevant FTI Consulting experts.
Selection of a distressed sale ("DS") discount
DS discounts are difficult to substantiate empirically, although valuers typically assume a range of 20%-40%. The selected discount should be justified by the valuer based on how the sales process and contract considerations are expected to differ from those in an orderly sales process.
Basis for a DS discount
Standard valuation methodologies e.g. market multiples and income approach analyses typically derive estimates for the value of a business as a going concern and assume a hypothetical transaction in the business under an orderly sales process ("OSP")
Valuations performed in restructuring contexts often need to consider the value that would be realisable from sales processes that are suboptimal relative to an OSP e.g. where a sale is required to be made on an accelerated basis or where the business is in financial/operational distress ("DS process").
Valuers therefore often derive a value estimate for the business on the basis of an OSP as a starting point, to which an estimate of a DS discount is applied to derive an estimate of the value realisable under a DS process.
Selection of a DS discount
DS discounts are difficult to substantiate empirically and indeed the circumstances surrounding sales processes differ from case to case. However, valuation practitioners typically consider a DS discount range of 20%-40% as a starting point.
In concluding upon a DS discount range to adopt, it is essential that the valuer clearly articulates how the sales process envisaged is expected to differ from an OSP. We set out across page 5 and page 6 a summary of the factors that we consider key to review when making this assessment, although we note that there may be other case-specific considerations to account for
Key considerations
DS discounts are typically material and often have a significant impact on the valuation conclusions. It is therefore essential to have a well-formed and clearly articulated view as to why and how the sale conditions are expected to differ from an OSP.
In forming such a view, it is helpful for the independent valuer to have detailed discussions with relevant parties (e.g. management and restructuring advisors) upfront, in addition to reviewing the financial position of the business (e.g. liquidity and capital structure considerations), to fully understand the basis of and related circumstances for an assumed sales process.
It is not always the case that the nature of a sales process within a restructuring context needs to reflect conditions materially different from an OSP, in which case a DS discount below the starting point range of 20%-40% may be appropriate (including no discount). Equally it may be the case that the sales process anticipated is so accelerated or lacking in available information that a much higher discount may be appropriate (including a situation where the asset simply attracts no interest). The 20%-40% starting point range should therefore be considered as applicable where the factors set out across page 5 and page 6 lie within a reasonable range, i.e. not at absolute extremes.
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