Valuation Aspect of Spin-Off

One of the most important aspects of a spin-off is the valuation of the business unit prior to the spin-off transaction. The valuation will consist of business valuation and the property valuation of the business unit that will perform the spin-off transaction.

From a business valuation point of view, the valuation object will depend on the transaction plan, whether it’s all the assets and liabilities in the unit business or some assets/liabilities. The identification of the Valuation Object is the most critical point to support the transaction.

There are a number of different valuation approaches and methods that can be used to value a business unit being a spin-off. Common approaches and methods include:

  • Income approach with Discounted cash flow (DCF) method: This method involves estimating the future cash flows of the business unit and discounting them back to the present value using a discount rate;
  • Market approach with Comparable company analysis method: This method involves comparing the business unit being spin-off to similar companies that have been recently acquired or that have gone public.
  • Asset-based approach: This method involves valuing the assets of the business unit being spin-off, such as its property, plant, and equipment.

The valuation method will depend on the specific circumstances of the spin-off transaction plan.

From a property valuation standpoint, it is important to identify tangible assets of the business unit being spin-off to be valued. The type of property is one of the things that need to be considered in determining the valuation approach used in the analysis.

Some common examples of Valuation Objects include:

  • Real Property
    • Properties such as land, houses, residential, commercial buildings, or industrial facilities.
  • Personal Property
    • Tangible assets other than real estate. Such as machinery & equipment, transportation equipment, heavy equipment, and inventories.
  • Commodities: Agricultural products, natural resources, metals, energy, or other tradable goods.

The Valuation Object determines the specific approaches, methodologies, and data sources used to estimate its value. The valuers have to consider factors such as market conditions, comparable sales, conditions, demand, scarcity, and other relevant factors to determine the value or worth of the specific valuation object. Common approaches and methods are:

  • Market Approach with comparable market data analysis method: This method is used when comparable and similar data are available on the market for properties;
  • Income Approach with Discounted Cash Flow method: The value of the property is determined by the capacity of the property to generate income and discounting them back to the present value using a discount rate;
  • Cost Approach with replacement/reproduction cost new method: This method involves estimating the acquisition cost of the property and considering the asset depreciation factor.

To provide client support in connection with the spin-off, the in-depth knowledge of the transaction plan and Valuation Object is a must. We believe our experienced and proactive teams will provide value added to support your transactions plan.

For more information regarding this matter, kindly contact our valuation experts.

Felix Ery Prasetya (Valuation Managing Partner)