Distressed sale discounts are integral to the valuation process in restructuring plans, ensuring that the relevant alternatives are assessed accurately. Daniel Smith, Andrew Charters and Clare Gilbert look at the key considerations when selecting a suitable discount and review examples of discounts applied in recent valuations.
Valuations in insolvency and restructuring scenarios are a multifaceted undertaking, involving intricate assessments of both tangible and intangible assets, legal and regulatory considerations, and financial projections.
A distressed sale (DS) discount refers to the reduction in the estimated value of an asset or company when it's sold under conditions that are less favourable than an orderly sales process. DS discounts are used to reflect the reality that assets sold under duress typically fetch lower prices due to the urgency of the sale and the limited pool of potential buyers. This often occurs in situations where the seller is under pressure to sell quickly, such as during insolvency or financial distress.
These discounts can significantly impact the valuation outcomes, making it essential for valuers to clearly articulate the specific circumstances of the sales process.
Key considerations for a distressed sale discount
While acknowledging that valuation is an imprecise science, valuers generally apply a DS discount within the range of 20% to 40%. However, the specific discount should be tailored to the unique circumstances of each individual case
Standard valuation methods, such as market multiples and discounted cash flows, estimate the value of a business as a going concern. These methods typically assume a transaction under an orderly sales process (OSP), which would represent a solvent sale in most cases
However, during periods of financial distress or insolvency, a DS discount is applied. This discount accounts for the value realisable from sales processes where a sale is completed on an accelerated basis
By their nature, DS discounts are challenging to substantiate. The appropriate DS discount depends on the specific circumstances of each case and the extent to which the value of a business, or its assets, would be impacted by an accelerated sale
The key to selecting the appropriate DS discount is to clearly articulate how the proposed sales process differs from an orderly sales process. The extent it is expected to differ will significantly influence the size of the discount applied.
Factors that may increase the distressed sale discount
Limited buyer pool: A small or highly specific group of potential buyers reduces competition, increasing the likelihood of a larger discount.
Comparable sales: Historical distressed sales showing significant discounts can set a precedent.
Discounted debt trading: Where associated debt is actively and consistently traded at a material discount, it signals market pessimism and can supports a higher DS discount.
Restricted due-diligence: Limited time or access to information increases perceived risk, prompting buyers to demand a higher discount.
Financial distress: A business or asset with unstable financials or uncertain future cash flows will attract a higher discount due to elevated risk.
Adverse legal and regulatory factors: Legal issues or regulatory barriers that could hinder the sale or future use of the asset will increase the discount required.
Unfavourable market conditions: Weak demand or oversupply in the market for similar assets will necessitate a higher discount to attract buyers.
Market testing: Not an obligation for a restructuring plan, but in Smile Telecoms' second restructuring plan (2022) the market testing heavily influenced the discount used.
Urgency of sale: A tight deadline to complete the sale often forces acceptance of lower offers, resulting in a higher discount.
Absence of warranties and indemnities: When sellers can't provide standard protections, buyers face greater risk and will demand a larger discount to compensate.
Relevance of distressed sale discounts to restructuring plans
In restructuring scenarios, particularly when considering restructuring plans, it's essential to evaluate ‘relevant alternatives’ to determine the best course of action. One critical aspect of this evaluation is the application of DS discounts
When assessing the value of a business or its assets under a restructuring plan, it's crucial to consider the conditions under which the sale will be made. If the sale is likely to occur under distressed conditions, applying a DS discount provides a more realistic valuation.
Restructuring plans often involve comparing different alternatives, such as continuing operations, selling assets or liquidating the company. DS discounts help in accurately comparing these alternatives by providing a realistic estimate of the proceeds from asset sales under distress.
By incorporating DS discounts, stakeholders can make more informed decisions about the viability and potential outcomes of different restructuring options. This ensures that the chosen plan reflects the true economic reality of the situation.
Distressed sale discounts: Share sale versus liquidation
The DS discounts used in the relevant alternative can represent the discount on the whole business, for example via a share sale or accelerated mergers and acquisition process (AMA), or the discount on the assets of the business, for example via a liquidation.
Share sale or AMA
- A relevant alternative could consist of a sale of the business in administration, an accelerated sale or divestment of the business, or distressed divestment of a whole (or part of a) business
- In such cases, a distressed discount is applied to the business as a whole
- The enterprise value of the business is calculated using EBITDA multiples, discounted cash flows, adjusted present value models or by other means
- The enterprise value is then discounted by a percentage to account for the distressed nature of the sale
Liquidation
- A relevant alternative could be the liquidation of a company or group
- In a liquidation, the assets of the business would be realised individually rather than as a group of assets (as with a share sale)
- In such situations, the expected realisations are calculated by valuing each class of asset held by a company
- A distressed discount percentage is then applied to each asset class to reflect the distressed conditions and likely restricted timeframe of any asset realisations
- The percentage discount applied will differ for each asset class depending on the complexities associated with realising the specific assets
The intention of this article is to focus on share sale or AMA discounts rather than liquidated asset valuations.
DS discounts in relevant alternatives: Share sale or AMA
The table below summarises the DS discounts applied in recent restructuring plans, where the relevant alternative included a sale of the business.
Sanction year: 2024
|
Company |
Industry |
Sanction year |
Relevant alternative |
DS discount |
Justification |
|
Chaptre Finance plc |
Financial Services |
2024 |
Distressed sales process in administration |
55% |
The discount (being higher than a usual DS discount) was justified by referencing case-specific risks including an immediate funding requirement of GBP 40-50 million – a funding risk which warranted a higher discount. The most directly comparable transaction referenced was the sale of a biomass plant by administrators in 2021, where the DS discount was up to 80% |
|
Cineworld |
Entertainment |
2024 |
Pre-packaged administration with business and assets sold |
30% – Business |
A 30% discount was applied based on precedent valuations in distressed scenarios |
|
40% – Brand |
Based on the view that intellectual property (IP) as a standalone asset is riskier and less marketable, it commanded a higher DS discount than the business |
||||
|
Superdry |
Retail |
2024 |
AMA process resulting in a ‘pre-pack’ of certain parts of the business |
30% – Business |
A 30% discount was applied based on precedent valuations in distressed scenarios |
|
40% – Brand |
Based on the view that IP as a standalone asset is riskier and less marketable, it commanded a higher DS discount than the business |
||||
|
Tasty plc |
Food and beverage |
2024 |
Sale of sites in administration |
N/A |
Not known |
|
Dobbies |
Retail |
2024 |
Sale of sites in administration |
30% |
A 30% discount was applied, consistent with similar cases. This was based on the relative attractiveness of the business at that time in the market, the financial weaknesses of the company, the limited time and ability to undertake due diligence, and the shortened timeframe (due to Christmas) |
|
Revolution Bars |
Food and beverage |
2024 |
Sale of loss-making sites and trade of remaining sites while an AMA process is conducted |
5%-20% |
A discount lower than the standard 20%-40% was applied due to the assumption that a level of distress had already been factored into the value of the group. The 5%-20% discount in the high and low scenario respectively factored in the severe levels of perceived distress and a significant impact on operational business in the relevant alternative. The competitive tension in the AMA process in the relevant alternative was expected to be reduced given the stakeholders were viewed as forced sellers |
|
Aggregate Holdings |
Real estate |
2024 |
Distressed sale of the business |
25% |
The discount was justified by the fact that the sale of the development would occur under forced sale conditions rather than an orderly sale. This situation arose as part of a liquidation process, where the urgency to sell impacted the sale price negatively. Additionally, the valuation considered other available assets, primarily the amount in the investment reserve account, which further influenced the discount percentage applied |
|
McDermott International |
Construction |
2024 |
Accelerated distressed disposal |
30% |
The discount reflected factors that depressed the business value, such as the lack of competitive tension, limited buyer pool, and time constraints. The 30% discount resulted in net proceeds of USD 198 million in the low case and USD 244 million in the high case, for valuation purposes. Similar discounts have been accepted in previous cases |
Sanction year: 2021-2023
|
Company |
Industry |
Sanction year |
Relevant alternative |
DS discount |
Justification |
|
Prezzo |
Food and beverage |
2023 |
Administration and pre-packaged sale of business and assets to a newly-established entity owned by the secured loan noteholders, in return for a release of their debt and security |
N/A |
No discount was presented in the court documents. The sale of the business in the relevant alternative was to a connected party and so any discount applied didn't reflect market conditions |
|
SGB-SMIT |
Manufacturing |
2023 |
Accelerated sales process |
30-35% |
The discounted price of the group reflected the accelerated nature of the proposed sale, referencing similar cases in the judgment |
|
GoodBox |
Packaging solutions |
2023 |
Sale of business in administration |
38% |
The most recent valuation of the company in administration calculated a value of GBP 375,000, compared with an original valuation of GBP 611,000. The discount of GBP 236,000 (38%) reflected the distressed nature of the sale and the market's perception of the company's value under distressed conditions |
|
Smile Telecoms |
Telecommunications |
2022 |
Administration of the company and liquidation of the trading companies |
30% |
The court documents referred to the matter of Virgin Active. In this case, a distressed discount of 30% was accepted. In the case of Smile Telecoms, the low end of this range was applied based on input from experts with considerable experience in valuing African telecom companies (a key characteristic of this case) plus market testing. |
|
ED&F Man |
Agricultural commodities |
2022 |
Accelerated divestment of the business units |
25% – Commodities |
Valuations of each individual commodities business unit calculated a 20% discount for coffee, 25% for molasses & liquid products (MLP) and 30% for sugar. The divestment of each business unit would require the sale of multiple legal entities and based on discussions with management, sale of commodities as a whole would be highly challenging in a compressed timeframe following a failed restructuring plan, and there would be little commercial interest in such a scenario |
|
15% – MLP North America |
The North American division of the MLP business unit was given a reduced DS discount due to this being the most likely element of commodities where a going concern share sale could be achieved. The division was legally and financially separable, which reduced the complexity of a sale |
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|
50% – Brokerage |
A significant distressed discount was applied to reflect the accelerated timetable and transaction complexity, alongside a significant level of distress in such a scenario |
||||
|
50%-100% – Other |
Other divisions such as various non-core subsidiaries were discounted at a higher rate to reflect the ongoing complexities (tax disputes, etc) within the entities |
||||
|
Virgin Active |
Health and fitness |
2021 |
Sale of business in administration |
30% |
Due to the ongoing liquidity challenges and urgent funding needs faced by the group in the event of a distressed sale (limited to a three-to-four week sales process), a discount of 30% was considered reasonable |
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