12.3 Chapter 3: terminology and general valuation framework

In this introductory chapter, the rather general definition of restructuring is discussed, after which paragraph an extensive general valuation framework has been presented. This general framework can be used for basically every valuation assignment. The steps are as follows and will be discussed below in more detail:

The first step is required to conclude upon the purpose of the valuation: why is this valuation carried out? Once the purpose has been determined, the standard or the premise of value should be determined. Generally, there are two options: the value in use (or the value to the holder) and the value in exchange. The value in use is the value for a selected purchaser or vendor. It can be seen as the investment value or the value to the respective party. Consequently, in order to execute a transaction, the value in use for the buyer must be higher compared to the value in use for the seller. Otherwise, rational parties would not conclude on a deal. The value in use for a buyer consists of the stand-alone value, which should be increased by the added value of expected (revenue or cost) synergies. This added value may also be based on the hidden growth potential of the company, the improvement of operational activities by (new) management and/or the creation of a competitive advantage.

It is also explained that various interpretations can be chosen in respect of the value in exchange. For example, one can choose between the highest bid or the fair market value, which is generally defined as the price at which shares would change hands between a willing buyer and willing seller, neither being under compulsion to buy or sell and both having knowledge of all relevant facts as at the applicable valuation date. The highest bid is what in Dutch jurisprudence and Dutch legal literature is referred to as the “waarde in het economische verkeer”.

As a third step the valuation concept should be chosen. This concept can be based on the more or less backward looking principle based on financial accounting parameters, or the forward looking concept based on financial economics. Little attention has been paid to the financial accounting concept since the corresponding methodology, book value, is less used in practice for the purpose of the enterprise or equity valuation.

The fourth step is that of choosing additional valuation assumptions. Those assumptions can for example contain various scenario’s, such as: (i) the continuity of the whole company or group (going concern scenario), (ii) the break-up of the group and thus the partial sale of various parts of the group (going concern), or (iii) the discontinuity of the group and its operating companies.

The last step is the one of choosing the correct valuation methodology or methodologies, since most of the time practitioners will use multiple methods in order to calculate a range of valuation outcomes.

Next to this general valuation framework, the terms liquidation value and reorganization value have been explained in chapter 3. Both concepts play an important role in respect of the U.K. scheme of arrangement, the U.S. Chapter 11 reorganization plan and the proposed Dutch scheme.

Liquidation value has an ambiguous meaning. From a financial-economic perspective, it has the meaning of the value of a business in the situation that this business is terminating its operations. For example, the International Glossary of Business Valuation Terms defines liquidation value as “the net amount that would be realised if the business is terminated and the assets are sold piecemeal”. However, from a Dutch legal perspective, the liquidation value can be higher and has a broader meaning. Namely, from a legal perspective, the liquidation value can also be defined as the going concern market value of the company. This is because in Dutch legal literature, the distinction is made between the liquidation of the goods of a certain legal entity (which can be done by either selling on a piecemeal or a going concern basis) and the liquidation of the company (not being the same as the legal entity). The practical relevance of this ambiguous meaning is explained by means of two recent Dutch cases, namely a judgment of the Dutch Supreme Court dated 2 June 2017 (OR DA Retailgroep/DA Retailgroep c.s.)1 and a judgment of the European Court of Justice, the supreme court of the European Union, dated 22 June 2017 (FNV/Smallsteps).2

The reorganization value is, like in U.S. jurisprudence, considered to be the enterprise value of the reorganized debtor, after the implementation of the reorganization plan. Thus, it is the enterprise value, based on a going concern business case, of the reorganized debtor with a restructured capital structure. However, since it depends on the definition of the enterprise value whether or not excess cash is included, one has to ascertain that excess cash (next to minority shareholding interests and/or other non- operating assets) is included in the concept of reorganization value.3

In, for example, Re Mirant Corp., 334 B.R. 800 (Bankr. N.D. Tex. 2005) it was emphasized that the enterprise value, which was calculated on the basis of the DCF-method and the Enterprise Value/EBITDA multiple, had to be increased with, amongst others, excess cash:

The same principle was applied in Re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011):

Consequently, the reorganization value must be equal to the total value, not only the enterprise value (based on operating activities), that is the distributable to the pre-restructuring capital providers, i.e. the claimants that exist immediately before the plan becomes effective.