How can a company be worth $1?
In a recent announcement Virgin has acquired the remaining 40% share of Tigerair Australia for the princely sum of AUS$1 – and many of you would be wondering “why on earth bother?” and “how is 40% worth $1 when almost two years ago it purchases 60% for $35m?”.
The answer to the second question emphasises one of the key issues that must be defined when valuing a business – market value and investment value. As it so happens, this is a real-world example of lesson #7 in our latest white paper 10 SMART Valuations Lessons You Must Know.
Effectively Virgin and Singapore Airlines have agreed that given the current industry conditions (route overcapacity, rising fuel and labour costs and intense price competition), the value to ANYONE for the remaining 40% share of Tigerair Australia is AUS$1. In other words, the market agrees that no one is likely to pay anything for a minority stake in a long-run loss making venture. Does it mean Virgin paid too much two years ago? It is possible that the reason a 40% share is AUS$1 now is because the price paid in 2013 was well above market value.
But more importantly it highlights the investment value concept. The market value of the remaining 40% share is AUS$1 but the value to a specific buyer (Virgin) is much more than this amount. Investment value is the benefit that a specific buyer can receive from ownership of a business. It can be suggested that only Virgin can capitalise on the benefits that Tigerair may bring because of its intimate knowledge of the business and the leverage of Tigerair Australia access to international routes. These arrangements may have locked out the possibility of any other buyer making a higher offer. Hence why the market value of the 40% stake is AUS$1 to anyone, but total ownership of the Australian arm is worth $35m to Virgin.
Investment value is the benefit the buyer gets from your business – not just anyone. Who may gain a specific benefit from owning your business? What are you doing to attract their interest? What is your business worth to them?