In June 2018, two European investors (Tenaris SA and Talta) applied to enforce a US$137 million ICSID award granted against Venezuela in December 2016 for the expropriation of their investment in two Venezuelan iron and steel companies in 2008 and 2009.
On 30 April 2008, the Venezuelan President Hugo Chavez nationalised by decree iron and steel companies based in the region of Guyana, including Tavsa and Comsigua, two indirect subsidiaries of Tenaris and Talta. On 14 July 2009, the Venezuelan president ordered the forced acquisition of the assets owned by these companies. The actual transfer of Tavsa’s assets took place on 16 November 2009. Comsigua’s assets were transferred to the Venezuelan state on 17 June 2011.
Tenaris and Talta (the claimants) claimed compensation from Venezuela (the Respondent) for this expropriation under the Bilateral Investment Treaties between Luxembourg and Portugal (respectively) and Venezuela.
While the parties’ experts agreed on the use of the Discounted Cash Flow (DCF) approach to quantify damages, they used different valuation dates and different assumptions in their calculations. For the purposes of this note, we will focus on the discount rate
Approach taken by the Claimant
The claimants claimed $243.7 million in compensation as at 30 April 2008 ($213.2 million for Tavsa and $30.5 million for Comsigua) plus interest.
The claimants applied a Weighted Average Cost of Capital (WACC) of 15.69% for Tavsa. This was calculated in part using a market risk premium of 4.79%, being the geometric average of historical rates from 1928 to 2007, and a country risk premium of 4.6% based on the interest spread between five-year USD bonds issued by the Venezuelan government and five-year US Treasury bonds.
With regards to Comsigua, the claimants’ expert calculated the WACC on the basis of an optimal capital structure for the company.
Approach taken by the Respondent
The experts valued the investment in Tavsa at $ 36.9 million as at 30 April 2008, and did not provide an alternative valuation of Comsigua.
The Respondent used a WACC of 21.87% for Tavsa, with a market risk premium of 6.2% calculated as an arithmetic average of historical rates, and a country risk premium of 14.75%, which was the rate accepted by a Tribunal in the Tidewater case, an award rendered in March 2015 against Venezuela. This rate was derived from the Ibbotson-Morningstar International Cost of Capital Report for 2009 and validated by comparison with the method adopted by Professor Damodaran.
The Respondent’s expert suggested using only the cost of equity as Comsigua had no debt.
Approach taken by the Tribunal
At the hearing, the Tribunal found four main areas of disagreement between the experts relating to the volume of pipe production, the price of pipes, certain costs and the discount rate. The Tribunal asked the two experts jointly to prepare a spreadsheet to enable it to choose between the two positions for each of the assumptions (or to choose a third position if necessary) and to update the calculation automatically.
Regarding the discount rate, five elements were considered relevant in deriving a suitable calculation of the WACC: the risk-free rate, the market-risk premium, the beta, the country-risk premium and the size premium.
The Tribunal noted an inconsistency in the claimants’ position when calculating the market risk premium. The claimant had used an arithmetic average to calculate the risk-free rate but a geometric average to calculate the market-risk premium. Consequently, the Tribunal decided in favour of the arithmetic average of 6.2%.
Regarding the country-risk premium, the joint expert report indicated a range from 4.6% to 14.75% depending on the additional risks that could be factored into the rate over and above the risk of default by the Venezuelan government. The Tribunal noted that the Respondent’s expert, who changed his position several times through the proceedings, did not specifically identify these additional risks and their impact on the country risk premium, so it applied a country-risk premium of 4.6%.
After taking into account all components of the WACC, the Tribunal derived a WACC of 21.7% and a value for Tavsa of $112,345,530.
For the calculation of Comsigua’s discount rate, the same assumptions were used. Ultimately, the Tribunal sided with the claimant on the basis that valuation standards require the WACC to be calculated with an optimal capital structure.
This case shows the willingness of tribunals to delve into the detail and, where necessary, go through components relevant to the valuation. The Tribunal used the valuation model jointly prepared by the experts to come to its own valuation figure. Where experts could not agree on a common position, the Tribunal made a decision based on the consistency and quality of evidence presented before it. This shows the importance of detailed, well-researched expert reports where every area of potential disagreement is addressed.
Claimant: Tenaris S.A. and Talta – Trading e Marketing Sociedade Unipersoal Lda