If the battle for Consolidated Minerals has proved anything, it’s that the biggest oxymoron in finance remains the ‘independent expert’s report’.
ConsMin, which is subject to an offer from Pallinghurst investment fund, commissioned PwC to prepare an independent expert’s report as required by the Corporations Act. PwC came up with a valuation of $2.33 for ConsMin, slightly above Pallinghurst’s initial offer of $2.30. That valuation, which cost ConsMin shareholders $500,000, has been ignored by the market and, more importantly, by former ConsMin boss Michael Kiernan. Kiernan’s company, Territory Resources, yesterday made an indicative proposal to ConsMin which valued the company at $3.72 per share – 60% more than PwC’s ‘expert’ valuation.
As noted in Crikey on Wednesday, PwC’s valuation of ConsMin used metal prices far below spot prices in determining future cash flows. Using lower spot prices of course led to PwC deriving a lower valuation for the company (which fitted in with management’s recommendation to accept Pallinghurst’s offer). PwC also used out-of-date valuations for ConsMin’s investments in listed companies, which knocked the valuation down further. Using current metal prices and updating the value of ConsMin’s equity investments could result in a valuation north of $4.00 for the company.
PwC’s $2.33 mid-point valuation of is even stranger when one realizes that PwC itself valued ConsMin at $2.70 last year (when it prepared an expert’s report for Titan Resources in response to a scrip bid from ConsMin). ConsMin shareholders must be wondering how PwC could come up with a lower valuation for ConsMin than in April 2006, given that manganese has increased by more than 200% and nickel by 90% since then.
While PwC seems to have been too conservative with its valuation, they didn’t get it as wrong as the most infamous of independent experts’ reports – the Grant Samuel valuation of GIO in 1998. In response to a hostile bid from AMP, GIO commissioned Grant Samuel to prepare an independent expert’s report. Grant Samuel claimed that GIO was worth as much as $6.71 per share, well above AMP’s offer price of $5.36 (this fitted in with GIO’s rejection of the bid). As a result, AMP was only able to acquire 57% of GIO. The remaining 43% regretted their decision, with GIO soon after announcing a $759 million reinsurance loss (and later being mopped up by AMP for $2.75 per share).
While GIO is an extreme example, you have to search far and wide to find too many examples of independent experts’ reports that contradict the wishes of management.
As Warren Buffett eloquently noted, the law has a bizarre definition of independence. For example, a wealthy director who has a 40% stake in the company (even if that 40% stake represents only a fraction of their net worth) is deemed to be ‘non-independent’. However, a non-executive director who earns 100% of his income from director’s fees and “hopes mightily to join other boards” is considered ‘independent’.
Similarly, it is absurd that the law deems an expert ‘independent’ when they earn 100% of their fee from the company they are valuing. If these so called independent experts come up with valuations that differ from management’s wishes, you can rest assured that the expert’s business will start to rapidly dry up.
Perhaps a solution could be for independent experts to form a panel, with each expert being selected by ASIC (rather than the company being valued) to prepare an expert’s report. While such a move may not improve the expertness of the valuation, it will at least make the valuation truly independent.
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Disclosure: The writer holds an economic interest in the performance of ConsMin shares