PwC Corporate Finance launches the fourth edition of its Valuation Methodology Survey

PricewaterhouseCoopers Corporate Finance recently launched the fourth edition of its biennial Valuation Methodology survey. The survey provides insights into the valuation methodologies, assumptions and parameters used in South Africa by financial analysts and corporate financiers. The survey represents the views of 25 of South Africa’s leading accounting firms, investment banks, corporate finance houses and large corporates who responded through electronic questionnaires.

The results were presented at function in both Johannesburg and Cape Town. The functions were attended by a variety of role players in the Corporate Finance industry.

Recent changes in accounting standards have resulted in the concept of fair value and general valuation methodology becoming an integral part of corporates’ financial reporting. Purchase price allocations, impairment testing, fair value measurements and adjustments in terms of International Financial Reporting Standards have required financial managers to obtain a greater degree of understanding of the concepts covered in this survey.

Since the completion of the 2005/06 survey an increase in general merger and acquisition activity in SA has resulted in an increase in both valuations performed for transaction purposes and fairness opinions provided for corporate buy-outs and private equity transactions. The raised level of transaction activity is important as the inputs received from the respondents reflect views that have been tried and tested in the marketplace over the past two years.

Specific topics that have been included in the 2007 edition include valuation issues regarding Black Economic Empowerment (“BEE”) transactions and the impact of the switch from a Secondary Tax on Companies to a withholding tax on dividends.

One of the issues covered in the section on BEE transactions includes the concept of a BEE discount on ruling listed price of a company to facilitate the entry of BEE shareholders. Respondents were requested to indicate if they would consider a discount on a listed share price to facilitate BEE and if so what range of discounts would they apply. 68% of respondents indicated that they would apply a discount and the graph below summarises the quantum of the discounts considered:

A question was also asked whether discounts are applied to reflect the lack of transferability inherent in the BEE structures and if so, what the range of values for these discounts are. The results indicated that these discounts tend to increase as the lock-in period increases, with an average lock-in discount of 29.2% being applied in the case of a 10 year lock-in period.

Other sections of the survey covered among others the following:

· The impact of employee share incentives on valuations;
· Which valuation approaches are most frequently used in South Africa;
· Technical issues around the use of discounted cash flow valuation models;
· Assumptions around the application of the Capital Asset Pricing Model;
· The most popular valuation multiples used in SA; and
· Discounts and premia to be applied for control, minority holdings and non-marketable shares.

The responses received on prior editions of the survey indicated that readers found the survey useful. We trust that this edition will similarly be of benefit to readers and contribute to the development of valuation practice in South Africa. Copies of the survey can be obtained on the PwC South Africa website.