NEW YORK -- Attempting to place a value on a healthy retailer is far from an exact science, but placing a fair value on companies in bankruptcy is even more elusive.
In the Chapter 11 of R.H. Macy & Co., valuations range from about $3.2 billion to as high as $5 billion. To a large extent, the valuation depends on the priority position of the creditor groups behind the assessment.
The creditors who are first in line for reimbursement want to keep the values low since they get paid at any valuation over $2 billion and the smaller the total distribution, the larger percentage of the whole their piece represents.
Creditors lower down on the payment chain want a larger evaluation so there will be something left over for them after the higher-ranking claims are paid off. These creditors, principally bondholders and unsecured trade creditors, contend the company is worth $4 billion. Even below the bondholders and unsecured creditors are the preferred shareholders, such as General Electric Capital Corp., CBS chairman Laurence A. Tisch, shopping center mogul A. Alfred Taubman and Hong Kong movie tycoon Run Run Shaw.
Preferred shareholders are facing a complete wipeout of their investments unless the value goes well above the $3.6 billion that Macy's has set in the preliminary plan it proposed on March 23.
Thus, some of preferred holders contend Macy's is worth close to $5 billion, especially if given a chance to stay in Chapter 11 for another Christmas.
It's all reminiscent of the story about the applicant for an accounting job who was asked what two and two equaled.
He quickly responded, "What did you have in mind?"
With all the variations based on self-interest, accountants in the industry do have some basic guidelines.
First of all, the accountants say, they have to determine why the firm is in Chapter 11, how much it will take to be fiscally sound again and how much damage was done to the company on the road to Chapter 11.
With the mergers and acquisitions boom of the Eighties over and more companies in Chapter 11 because of the added debt brought on by some of the takeovers, investing in companies in bankruptcy has become a hot area for Wall Street firms.Many professionals use cash flow multiples as the foundation for evaluating firms in bankruptcy.
"It is normal for the acquirer of a non-bankrupt company to use a multiple of cash flow to determine its value, so it is fair to use the cash flow multiple for a bankrupt company," said Nicholas Gallopo, a partner with Arthur Anderson & Co.
"When you're talking cash flow and using the cash flow multiple, you're really talking profits and ultimately net worth because it all starts from the top down," said Stephen I. Soble, chairman of Stephen I. Soble & Co.
While the accountants agreed with the ability of cash flow multiples to formulate a company's value, both warned that multiple was just one tool and shouldn't be used alone.
"You have to take into account earnings projections, needed investments in the franchise and management's ability," said Soble.
A cash flow multiple uses a company's average monthly cash flow in determining a selling price. The investment banking community determines the multiple by tracking several deals in the recent past similar to the one being analyzed and determining an average of the selling prices divided by cash flow.
These are seen as more reliable than earnings multiples in Chapter 11 deals.
"Using earnings multiples is sometimes tricky when dealing with Chapter 11 companies because the companies are cleaning up house, don't have to pay debt and therefore don't have real earnings to multiply, only projections -- and projections are only as reliable as those making them," Gallopo noted.
Earnings, he added, are harder to project than cash flow and therefore, by nature, more suspect.
"Cash flow is there in black and white. If you can project a sales line with some accuracy -- and you can -- it all flows from the top down," Gallopo said.
At Mahoney Cohen & Co., partner Nate Lubow said the cash flow multiple being used to evaluate the worth of R.H. Macy was a viable index, but not the only index a creditor should look at to determine how much a company is worth.
"You have to start out by looking at why a company is in bankruptcy," Lubow said. "They either got there because it or the economy was in bad shape, because they overexpanded or because they weren't very smart.""You can use an earnings multiple in either of the first two instances but would be better off using a cash flow multiple in the third instance, where a business went into bankruptcy because management just wasn't smart enough."
"It's tough to evaluate those types of businesses, because you don't know if management has gotten smart."
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