The case

This case was heard in court in July 2012, with two camps taking up cudgels against one another. The opinions of a considerable number of valuers were mentioned. Those involved in various aspects included three of the “Big Four” accounting firms and also three specialist valuation businesses.

The written decision includes the dissection of various valuation principles and therefore provides some fascinating insights into the points being argued in court.

The judge summarised the various legal proceedings very succinctly: “At their heart is a battle between a group of senior lenders and a group of mezzanine lenders and, in the middle, a security trustee.”

There were also proceedings taking place in German courts, with the mezzanine lenders taking legal action against the borrower.

This was, rather unusually, a declaratory action, that is a case brought at the instigation of the defendants in order to resolve outstanding litigation against them.

The Stabilus Group

This was a German group which had been set up in the strident days of 1934. It had become the leading manufacturer of gas springs and hydraulic vibration dampers for the automotive industry and for chairs. Some 80% of the turnover related to the automotive industry, with each car requiring between three and six such springs.

There had been various transactions in its shares, including leveraged purchases. The group was very badly affected by the economic mayhem of late 2008, largely due to the high level of its borrowings: by 2010 it owed 409 million Euros of senior debt and approximately 83 million Euros of mezzanine debt.

Its finances by this stage were hand-to-mouth, with further short-term funding provided by the senior lenders as it struggled for survival. Both suppliers and customers were nervous at the possible outcomes. The senior loans were trading on the secondary markets at a discount of up to 40% in consequence of this financial strain.

Despite these major problems, there was a sound business at the heart of the Stabilus Group.

Drawing the battle lines: “the French are bravely in their battles set”

The immediate cause of the dispute was the decision by the senior lenders to undertake a restructuring of the Stabilus Group whereby its debt levels were reduced and made sustainable. It was their view that there was no appreciable value in the equity or in the mezzanine debt and that the senior debt was significantly impaired. The mezzanine debt became effectively worthless as a consequence of this restructuring.

The senior lenders were concerned for this transaction to take place with consent: they had therefore offered the mezzanine debt holders 4.2 million Euros in order to obtain that consent.

The mezzanine debt holders, several of them French investment funds, considered that they should be participants in the restructuring and that they should receive a proportion of the equity of the restructured entity. In support of their position they reminded the senior debt holders of the prospect of “lengthy and potentially destabilising litigation” and “time and money consuming litigation”.

Preparing for the action: “all things are ready, if our minds be so”

Mike Weaver of American Appraisal was instructed to undertake an enterprise valuation and the project was undertaken in late 2009 and early 2010.

The judge was impressed with various aspects: these included the 270 hours of time that was spent in this work and also with the extent and quality of the contact with the Stabilus management team.

The American Appraisal valuation was undertaken on three different bases: these were described by the Judge as discounted cash flow, market multiples and an assumed leveraged buyout. The results of these different approaches were a final enterprise valuation range of 188 million to 208 million Euros.

The implications of this valuation range were that the mezzanine debt had no value and that the senior debt, at that time at a level of some 409 million Euros, was significantly impaired.

Mike Weaver of American Appraisal was a witness to the fact rather than an expert witness at trial. There were three expert witnesses involved in the arguments over the methodology and approaches used in the valuation report prepared by American Appraisal.

The expert for the mezzanine lenders, perhaps understandably, had a very different view of the enterprise value: he maintained that the value of the Stabilus group was 490 to 500 million Euros including the pension liability. This valuation was well above the level of the senior debt and indicated that the mezzanine lenders had a material economic interest in the values. This valuation was also more than twice that produced by American Appraisal.

The judge recognised that the expert for the mezzanine lenders was at a distinct disadvantage as he did not have access to the management of Stabilus in the same way that American Appraisal had done. However, he had apparently not seen the witness statements of the leaders of the management team.

This, combined with the preparation of alternative forecasts – some time after the relevant events, placed him at a disadvantage: there was insufficient evidence that there had been any bias in the forecasts prepared by the management team.

The assault – “bid them come down, or void the field”

The valuation expert for the mezzanine lenders attacked the American Appraisal valuation on several grounds. Some of the more interesting valuation points were as follows.

• Should the Beta calculations be based on 60 monthly data points, or were a larger number of weekly data points preferable? The judge was of the clear view that monthly data points were to be preferred. He was convinced by the argument that weekly data points can give false readings if the shares in the guideline companies are thinly traded. He was impressed by the extent of the academic backing to this approach and also by the fact that weekly Betas always give a lower reading than monthly Betas. Mike Weaver’s Beta of 1.5 was considered to be an appropriate Beta to use for a company in an industry which was in a cyclical sector.
• Should an Alpha adjustment be included? The judge supported the use of an Alpha adjustment which he described in a similar way to a small company premium. The Alpha adjustment was actually designed to capture various features of Stabilus, both size and also other risk characteristics.
• What was a reasonable weighted average cost of capital (WACC)? The judge concluded that WACCs in the range from 11% to 12% were reasonable: WACCs at this level were consistent with other sources and were soundly based on a 20-year German Government bond, which was yielding some 4% in late 2009 or 2010.
• There was no information in the published decision regarding the Equity Risk Premium or the appropriate weightings of equity and debt in deriving the WACC.
• Should the EBITDA multiples derived from the market be adjusted by qualitative or quantitative factors? The judge found no fault with the fact that the EBITDA multiples applied included a significant discount which was based on qualitative judgement rather than quantitative analysis. He recognised that the choice of multipliers was largely reliant on the levels of growth possible in the future. The Stabilus Group had been growing at a lower rate than the rest of the industry and this justified a lower multiple.
• How rapid would the recovery be, after the low point of late 2009? The judge identified that the valuation in late 2009 and early 2010 had to be based on the evidence available at that time. There were no grounds to overturn the forecasts produced by the management in favour of forecasts prepared by an expert at a later date.  A stronger recovery in late 2010 could not reasonably have been anticipated.

The verdict – “the day is yours”

The judge agreed with the American Appraisal valuation in every material respect. He decided for the senior debt lenders and against the mezzanine lenders as there was no economic value in the mezzanine debt in late 2009 and early 2010.

The various aspects of this case were explained by Mike Weaver together with Andrew Robinson of Deloitte, one of the valuation experts, at the ICAEW Valuation Group Annual Conference held on 09 July 2013.

Andrew Strickland, Corporate Partner, Scrutton Bland
Valuation Group, August 2013