Valuation in a world of change

Disruption in Markets

Shares in limited companies are very complex assets. They represent, in legal terms, a bundle of different rights. They are therefore stubbornly challenging to value in the most settled of times. That challenge is heightened in a whirlpool of change.

There are various parts of the economy where the rate of change is visible for all of us to see. I am selecting two areas, separated by broad vistas, in which change is either happening at a troublingly rapid pace or is threatened.

All Change in the Energy Sector?

The energy industry is a sector which has conventionally relied upon the fossil fuels of coal, oil and gas. In clear sight, or on the horizon, are several disruptive forces:

• The continuing growth in the importance of renewables, not only solar and wind, but also biomass, anaerobic digestion, hydro and others;
• Reduced costs of electricity storage in the form of emerging battery technologies;
• The increasing trend for electrically powered cars and other vehicles.

The potential disruption of the renewables sector has been reviewed by Cambridge academics. This resulted in a recent headline in the Press: “Green Energy to wipe trillions from the global economy”. The article went on to talk ofthe bursting of “the carbon bubble”.

It is perhaps unsurprising that Saudi Arabia has in train an all-encompassing project with the aim of diversifying its economy away from its present heavy reliance on oil.

The big energy companies need to plan well in advance: this applies to those drilling for oil and gas, but also to the large electricity generators. Long term projections of revenue streams and related costs are required as part of project appraisal.

For those engaged in financial reporting, the assessment of asset retirement obligations and the reviews of impairment testing require some of the same skills as are used in the valuation of shares of companies. The potential and actual disruptions in the energy sector are therefore very live issues in the world of business valuation. This has been evidenced by a wave of bruising impairments in the generation sector

As challenging as it is to think forward in terms of decades rather than weeks or months, this is what is required when looking at many energy assets. When faced with the shifting sands of change, impairment reviews and the timings of remediation liabilities take on enigmatic complexities.

The Death of the High Street?

We are all aware of the constant news items in the media regarding retail; the independent greengrocers and butchers, for so long a familiar feature of town centres, have disappeared in large part, unable to compete with the large grocery multiples.

That has been followed by the greater and greater focus on on-line sales. Some commentators argue that the traditional retail outlets should be given some form of relief from business rates; others suggest that such a step would represent an unhealthy subsidy and unwarranted protection against those who are innovating and driving through change.

Those same grocery multiples have then been put under pressure by new European competitors; in addition to this, the large on-line retailers are assailing their customer base from a different direction.

At the same time we hear of corporate voluntary arrangements as being an increasingly common feature of parts of the retail sector as a means of obtaining reductions of rental costs. Other large retailers are in the news as they seek specialist consultancy advise in respect of their business options.

The Role of Business Valuation

There is no permanence to be had: business valuation as a discipline is not immune from the forces driving change through much of the economy. Increasingly sophisticated tools are being developed by those who are serious about business appraisal. Growing regulation and improved training are enhancing the skills of those engaged in business valuation.

It would be ironic indeed if we tried to address the valuation of fast-moving sectors disturbed by disruptive change using the tools and techniques honed many years ago. We all have a duty to make sure that our knowledge and skill base evolves and changes in line with the change which is to be seen all around us.

Andrew Strickland will be speaking at this year’s Valuation Conference. To get a greater return from our events, use the code MORE25 to receive 25% off your conference ticket.