Presentation on theme: "VALUING A DISTRESSED BUSINESS:"— Presentation transcript:
1 VALUING A DISTRESSED BUSINESS: ABI 22nd ANNUAL SPRING MEETINGVALUING A DISTRESSED BUSINESS:CONCEPTS EVERYONE NEEDS TO KNOWApril 17, 2004William Q. Derrough Jefferies & Company, Inc.Sanford L. Edlein Glass & Associates Inc.Melissa K. Knoll KPMG LLPJamie G. Pierson FTI ConsultingLynette R. Warman Jenkens & Gilchrist PC
2 VALUING A DISTRESSED BUSINESS FoundationThe Business PlanBusiness Plan ComponentsValuationUses of valuation in bankruptcyBasics, Approaches, DriversIssues to consider in distressed valuationArt vs. ScienceSubjectivity: where does it impact valuation methods?Lessons Learned
3 VALUATION FOUNDATION The Business Plan The plan comes first, then the capital structure and related valuation.Plan components:ManagementCore business unitsProjected financial results
4 MANAGEMENT Old management Are they the same who put it in the ditch? Are they capable of operating under the revised operating structure?What is their end game and reward?MotivationsNew managementCan they achieve their goals and objectives?
5 CORE BUSINESSWhat business or segments are part of the on going business?What has changed given the bankruptcy?ProductsServicesCostOperating processesWhat external factors must be considered?CompetitionStrengths/weaknessesLong-term dynamicsProduction shifting offshore?Currency /interest rate outlookCommodity pricesTrade policies
6 PROJECTED RESULTS Review and challenge basic assumptions: Revenue Operating resultsEBITDAFree cash flowWorking capital and the balance sheetPast performance vs. projected future performanceOtherMarket ShareWhat do projections imply? Realistic?The telecom conundrum: 100 companies cannot each achieve 5% market share
7 USES OF VALUATION IN BANKRUPTCY Secured Creditor IssuesAdequate protection (Section 361)Relief from the automatic stay (Section 362)Use, sale or lease of property – cash collateral (Section 363)Obtaining credit – priming (Section 364)Claim determinationSecured versus unsecured (Section 506)Recourse versus non-recourse (Section 1111(b))
8 USES OF VALUATION IN BANKRUPTCY Plan of ReorganizationFeasibilityRecovery for various creditor classes (i.e. “dividing up the pie”)New equity contributionCram down – fair and equitableBest interests test – liquidation valueSale of Assets (Section 363)
9 USES OF VALUATION IN BANKRUPTCY Accounting TreatmentSOP 90-7: Fresh start accounting – reorganization valueFAS 142: Goodwill and other intangible assetsFAS 144: Impairment or disposal of long-lived assetsRecovery Actions - Solvency AnalysisPreferences (Section 547)Fraudulent conveyances (Section 548 and 544)Reclamation (Section 546)
10 VALUATION – INTRODUCTION General PremisePresent value of future benefitsInvestor should only pay what one thinks benefits are worth given a rate of returnRate of return varies depending on type of investor, asset, risk, etc.Enterprise Approach vs. Equity Approach
11 Preferred Shareholders VALUATIONDistribution Of Cash Flow Among ConstituentsGovernmentLendersPreferred ShareholdersCompanyEBITEBTEarningsCommon Shareholders$InterestDividendsTaxesDividends $
12 HYPOTHETICAL COMPANY, INC. VALUATIONHow Do You Calculate Enterprise Value?HYPOTHETICAL COMPANY, INC.($ in millions, except share price)Fully Diluted Shares100.0Share price$20.00Market Value of Equity$2,000.0plus:Total Debt (book)1,500.0less:Converted Debt<0.0>Preferred Stock200.0Converted PreferredCash & Cash Equivalents<100.0>Minority Interest in Subsidiaries0.0Enterprise Value$3,600.0
13 Non-Marketable Minority VALUATIONTheories Behind Premiums and DiscountsMaximum valueattributable to astrategic buyerSale valueMBOLBOIPOPublic tradingNon-public stockPremium forcontrolMinority interestdiscountDiscount for lack ofmarketabilityPremium for strategicvalue / synergiesControlling interestvalueDiscount for lack of marketability / liquidity[NYSE vs. OTC:BB]Non-Marketable MinorityValueMarketable MinorityControlling InterestInvestment Value
16 VALUATION Drivers (cont.) Qualitative characteristics Quality and depth of managementCustomer and vendor concentrationIndustry dynamics [Market share, competition, raw materials/commodities]Company’s position / reputation in the industryDiversificationProduct offeringGeographyVendor relationshipsSeasonality / cyclicalityPower over vendors / customersAbility to expandEmergence / intensification of foreign competition
17 VALUATION Issues to Consider in Distressed Valuation Is it financial or operational distress?Operational distress much more difficult to rectifyReliance on the DCF approach versus the market“Reasonable” projection assumptions“Hockey stick” projectionsPercentage of value from terminal periodUnreliability of using beta for calculation of equity cost of capitalCapital structure – general reduction in debt as a component of the capital structureIf top line growth, how achieve results and are the cash expenses / expenditures included in the projections?Increased capxIncreased R&DIncreased marketing
18 VALUATION Issues to Consider in Distressed Valuation (cont.) SubjectivityDiscount to public multiplesInclusion of small cap premium and company specific risk in cost of equityNormalization of representative cash flows – often only way to get to positive earnings metricsInclusion of net operating losses (“NOLs”) – limited by cancellation of debt (“COD”) income and change of control provisions of the Internal Revenue CodeInclusion of other non-operating assets (real estate, plants, facilities that have been previously closed)Judges’ / courts’ recent decisions regarding valuations and the application of subjectivity (e.g. Exide)
19 VALUATION: ART VS. SCIENCE Judge Carey’s opinion in Exide Technologies clearly stated preference for minimizing subjectivityDoes this mean valuation is a pure science? Can you just input numbers into formulas?NO!Subjectivity and judgment are often required, but must be grounded in analysis, reason and contextual considerations
20 WHERE DOES SUBJECTIVITY IMPACT VALUATION MOST? Discounted Cash Flow AnalysisDiscount rate usedCost of equityCost of debtTerminal ValueMultiple chosen- Based on market comparables?- Choosing time to sell –buy low, sell highMarket Comparables and M&APeriod for analysis (LTM, Projected)Choice of comparablesSize, Business, Competitors not ComparablesChoice of M&A CompsHow do you look back?“Perfect” comps?
21 LESSONS LEARNED FROM EXIDE A company’s expected improvement in performance must be considered (LTM results vs. Projected)Adjustments (discounts / premiums) to results of analysis must be explainable and based in some reason / factConsideration of macro and micro economic drivers is appropriate, but application of adjustments must be understandableCurrency, commodities, GNP, etc.“Lack of liquidity” due to Chapter 11 may not be used to discount valueSupports Traditional Investment Banking Valuation TheoryArt vs. scienceConsideration of unquantifiable qualitative issuesSubjective, yet reasonable and supportable adjustments
23 WILLIAM Q. DERROUGHManaging Director & Co-head of Recapitalization & Restructuring Group - Jefferies & Company, Inc.520 Madison Ave., 12th Fl. New York, NYBill Derrough is Managing Director, co-head of Jefferies’ Recapitalization and Restructuring Group and head of the firm’s New York Investment Banking office. At Jefferies, he works with a diverse group of clients and investors in a wide range of industries. Since joining Jefferies in early 1998, he has been actively involved in restructurings, recapitalizations, financings, mergers, acquisitions, divestitures, asset sales and other transactions. His practice is particularly focused on providing creative non-bankruptcy solutions to balance sheet and liquidity problems through exchange offers, refinancings and other capital market driven solutions. Since 1988, he has personally led the restructurings of over $30 billion in liabilities on behalf of companies, creditors and other investors.Prior to joining Jefferies, Mr. Derrough was Principal with the private investment firm of Doyle & Boissiere where he focused on distressed investments. Prior to Doyle & Boissiere, Mr. Derrough was Senior Vice President of Chanin and Company, where he led a number of complex restructuring and M&A transactions. Prior to Chanin, Mr. Derrough worked at Salomon Brothers on numerous finance and merger transactions for a wide variety of companies in retailing.Mr. Derrough has serves as a Director of Strategic Partners, Inc., and was the bondholder representative on the Board of Directors of Scott Cable Communications.
24 SANFORD R. EDLEIN Principal – Glass & Associates Mr. Edlein has been an owner and entrepreneur as well as a consultant and senior executive for privately held and public companies for more than 30 years. He has a consistent track record in the design, development and implementation of cost-containment and revenue-enhancement strategies and has assisted a wide range of companies in financial and operating matters, corporate governance, crisis management, and mergers and acquisitions. Mr. Edlein has served on the boards of directors of several public and private companies He was the recipient of the 2001Turnaround of the Year award from the Turnaround Management Association and is a past president of the Dallas Chapter of TMA and currently serves on the ABI Board of Directors. PROFESSIONAL EXPERIENCEPrior to joining Glass & Associates as a principal in 1999, Mr. Edlein had been a principal with The PWS Group and president and CEO of his own consulting firm. In addition to having served as CEO,COO and CRO of several public and private companies, he was a practicing CPA for many years including five years as the managing partner of the Boston office of Grant Thornton, LLP. Mr. Edlein has extensive experience in a broad variety of situations and industries, including continuing education, distribution, family entertainment centers, franchising, golf course management, golf products and sporting goods, health services, technology, manufacturing, moving and relocation services, oil pipeline and storage, professional services, professional sports teams, property management, real estate, retail, security systems, software, and trading.EDUCATION / PROFESSIONAL AFFILIATIONSBBA, Accounting, City College of New YorkCertified Public AccountantCertified Turnaround Professional
25 MELISSA K. KNOLL Partner, KPMG LLP Melissa Kibler Knoll is a partner in the Corporate Recovery practice of KPMG LLP in the Chicago office. Ms. Knoll has over thirteen years of experience providing accounting and financial advisory services in a variety of industries to companies, secured lenders, unsecured creditors and other parties in bankruptcies, restructurings, turnarounds and related litigation. Ms. Knoll has recently lead engagement teams in large, complex restructurings including Kmart Corporation (unsecured creditors’ committee), Bethlehem Steel Corporation (unsecured creditors’ committee), The Warnaco Group (pre-petition bank group), Capital Consultants LLC (receiver), The Singer Company (unsecured creditors’ committee), Iridium (debtor), and companies involved in out-of-court restructurings in the steel, healthcare, distribution and other industries.Ms. Knoll joined KPMG LLP in June of Ms. Knoll is a Certified Public Accountant and has passed the Certified Turnaround Professional and the Certified Insolvency and Restructuring Advisor examinations. She is the co-chair of the American Bankruptcy Institute Young and New Members Committee and a former board member and treasurer of the Turnaround Management Association Northwest Chapter. Other professional and business affiliations include the Association of Insolvency and Restructuring Advisors, International Women’s Insolvency & Restructuring Confederation, American Institute of Certified Public Accountants and the Illinois CPA Society. Ms. Knoll earned her Bachelor of Business Administration summa cum laude from Texas A&M University and earned her Master of Business Administration, graduating first in her class, from Southern Methodist University. She is a frequent speaker regarding bankruptcy and restructuring topics.
26 JAMIE G. PIERSON Managing Director – FTI Consulting Mr. Pierson is a Managing Director in the Dallas office of FTI’s Corporate Finance Practice where he concentrates on lender representation. Mr. Pierson’s expertise encompasses both in- and out-of-court restructurings which include debt capacity and capital structuring analysis, minority and change of control valuations, liquidation and recovery analysis, fairness opinions, solvency opinions, leveraged transaction analysis and merger and acquisition advisory. Mr. Pierson has also represented both secured and unsecured creditors in the 363 disposition process.Prior to joining FTI, Mr. Pierson was with a boutique investment bank that raised private equity for public companies. Previously, Mr. Pierson was with the investment bank of Houlihan Lokey Howard & Zukin where he valued publicly traded and privately held companies, authored private placement memorandums and modeled complex change of control transactions including solvency opinions and leveraged buyouts.EDUCATION / PROFESSIONAL AFFILIATIONSM.B.A., University of Texas at Austin - concentrations in Finance and Entrepreneurship, 1997B.B.A., University of Texas at Austin - concentrations in Finance and Accounting, 1992Association of Insolvency and Restructuring Advisors, MemberTurnaround Management Association, MemberAmerican Bankruptcy Institute, Member
27 LYNETTE R. WARMAN Managing Director – Jenkins & Gilchrist PC Lynnette R. Warman is a shareholder in the Bankruptcy and Reorganization Section of the law firm of Jenkens & Gilchrist, a Professional Corporation. Ms. Warman received a Bachelor of Arts degree in Political Science from the University of Nebraska Omaha. She graduated magna cum laude from the Creighton School of Law.Ms. Warman is admitted to practice in the State of Texas, the United States Court of Appeals for the Fifth Circuit and each of the four federal judicial districts in Texas. She is a longstanding member of the American Bankruptcy Institute ("ABI"), where she currently serves as a Director, and formerly served as the co chairperson of the Unsecured Trade Creditors’ Committee, the Dallas Bar Association, the Dallas Bankruptcy Bar, the American Bar Association, and the Litigation and Business Law sections of the American Bar Association. She is a former member of the Turnaround Management Association, for which she served as the secretary of the local chapter for two years.Ms. Warman’s practice includes representing unsecured creditors' committees, secured and unsecured creditors, and debtors in Chapter 11 reorganizations and restructures. Ms. Warman frequently authors articles dealing with credit issues for publication in national credit publications. She is also a frequent speaker to various national credit groups, and often teaches in seminars on varied topics relating to credit professionals, chapter 11 reorganizations and corporate restructures.
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