Holdings of 51% and 9% respectively in BG Foods Limited were transferred to two companies held within an offshore insurance bond. The Hearing took place in January 2015 to determine the market values of the shares.
BG Foods Limited had been started in the 1980’s and supplied its own brand dairy products to supermarkets. The 40% holding not owned by the Foulsers was held by an individual and 3i plc.
Value indicators
The perceived value of the Company was increasing rapidly in the late 1990’s: in 1996 there were discussions for a possible sale of the combined 60% holding of Mr and Mrs Foulser for £12m; by 1997 this had increased to £16m. There were then detailed discussions in late 1997 relating to a proposed management buy-in with the 60% holding being valued at £26m. The discussions were underpinned by a belief that the company could generate profits before tax of some £4.5m in a normal year.
The tribunal was aware that a sale was eventually achieved, in late 1998, for some £27,348,000 for the 60% holding.
The valuers
Mr Brian Spence, chartered accountant and director of Montpelier Professional (Manchester) Limited was the expert for Mr and Mrs Foulser. Mr Spence valued Mr Foulser’s 51% shareholding in BG Foods at £6,000,000, and Mrs Foulser’s 9% holding at £243,750. The expert for HMRC was Mr Christopher Glover, who was described by the Tribunal as, "…one of the leading specialists in share valuation." Mr Glover’s valuation of Mr Foulser’s holding was £20,638,000, and that of Mrs Foulser £2,500,000.
The tribunal was in no mood to apply the wisdom of Solomon by carving through the middle. It stated bluntly, "The difference between the valuations must mean that one of the methodologies adopted is fundamentally flawed and must be ruled out."
Profits and multiples
The tribunal preferred Mr Glover’s use of the unvarnished after-tax profit of the company for the year ended 30 April 1997, to Mr Spence’s calculation of future maintainable profits based upon later management accounts and other information.
Mr Spence used the BDO PCPI as the best indicator of the price earnings multiple that should be applied. The tribunal did not accept this and summarised its views by saying, "There is no transparency of the PCPI. No information is available as to the number of private company acquisitions on which the average P/E ratio is based. Nor is anything known about the companies concerned, including their activity and size. It is thus impossible to take any view on comparability."
Mr Glover used the 25 companies in the food producers sub-sector of the FTSE Index and chose six guideline public companies from this list. The comparisons led Mr Glover to conclude that the growth of earnings of the company was far superior to that of the growth of the 25 listed food producer companies.
Aiming for the target
Mr Glover selected a P/E ratio of 15 for the company which was a discount of some 25% from the food producers’ sub-sector index of 19.67.
Mr Glover then applied a bid premium. His report noted that ‘Acquisitions Monthly ’ reported average bid premiums of 42%, 29% and 35% in the first three-quarters of 1997 respectively. He selected a bid premium of 40%, being mid-way between the normal range of 30% to 50%. This increased his P/E ratio from 15 to 21.
Mr Glover applied this historic P/E ratio to profits after tax of £1,927,000 and derived a value for the entirety of the share capital of £40,467,000. He then derived a forward looking PE of 15 by the assumption of a growth of earnings of 40%.
The prospective P/E ratio of 15 was then compared by Mr Glover with bids for UK food companies, both quoted and private, which were recorded in Acquisitions Monthly.
Mr Glover concluded that a prospective P/E ratio of 15 for BG Foods appeared reasonable by comparison. Mr Glover also noted that Cavaghan & Gray, one of the 6 guideline companies which he had chosen, was itself acquired by Northern Foods in February 1998, shortly after the valuation date. The data derived from Acquisitions Monthly showed an adjusted historic P/E ratio of 22.2 and Mr Glover concluded that the Cavaghan & Gray acquisition price lent strong support to an entirety value of BG foods of £40,467,000.
Discounts and premia
Mr Spence relied upon the 3rd edition of Practical Share Valuation, by Eastaway, Booth and Eamer, which stated that in the case of a trading company a 50.1% holding would command a discount of at least 20% to 25% in normal circumstances. The Tribunal accepted this highly regarded source and determined that the discount for the 51% holding should be 20%, rather than a lower discount of 15% as initially applied by Mr Glover.
The tribunal considered that it was appropriate to make an adjustment for a bid premium. However, it felt that the 40% as used by Mr Glover should be reduced to 35%.
Mr Glover applied a discount of 40% from the entirety value in valuing the 9% holding. This approach was accepted by the tribunal in preference to the notional dividend yield as used by Mr Spence. However they were of the view that the discount should be increased to 50%.
A special purchaser?
An indicative offer had been made on behalf of 3i in October 1997 of £26m for the combined 60% holding of Mr and Mr Foulser. This was an early move in the transaction which eventually completed in November 1998, for consideration of over £27m as referred to above. The tribunal had to determine what impact this offer should have on the values of the two holdings of 51% and 9% in November 1997.
The views of Mr Spence were clear. No account should be taken of this transaction, "…not just because it was a sale by private treaty, rather than being based on a fiscal valuation basis," but also because he regarded 3i as a special purchaser.
Mr Glover expressed the view that a prospective purchaser of the 51% shareholding, being aware of this offer "…would have been prepared to pay at least the full pro rata of his shareholding ignoring the offer." That would therefore eliminate the 15% discount for lack of full control and lead to a value for the 51% shareholding of £20,638,000. He also increased his assessment of the value of the 9% shareholding to £2,500,000. This reflected a discount of 36% to the pro rata valuation.
Conclusion
The Tribunal concluded that 3i was a special purchaser; however they also concluded that a buyer of the shares in November 1997 would not have assumed that the offer was likely to succeed. The offer would have been a suitable cross check but would not have triggered a premium on the price.
Andrew Strickland, Scrutton Bland
Valuation Group, October 2015
