Independent Expert Valuation - Critique Part Three.

In the Critique Part Two I closed with a comment about the lack of a control premium in the Independent Expert (IE) DCF Valuation.

Good cyber friend "Griggy" has pointed out yet another contradiction in the IE Valuation that relates to this.

The IE, in discussing the control premium in his FME valuation, makes the following statement.

some of the observations of very high premiums are for relatively small listed companies where there is typically less trading liquidity in their shares and they are not closely followed by major broking analysts. In such situations, the traded price is more likely to trade at a deeper discount to fair market value on a control basis. Accordingly, the observed control premiums to share trading prices for such stocks will tend to be higher.

Well, paint me red and call me a fire engine, those specifications couldn't better define the ASX trading situation of Cellestis.

• Cellestis is a small listed company. 
• Cellestis has a very low trading liquidity. 
• Cellestis is not covered by any major broking analysts.

But, don't take my word for it.

The IE himself states the following:

Cellestis shares are thinly traded on the ASX. Consequently, Shareholders face limited opportunities to achieve liquidity in respect of their shares in Cellestis. (Annexure 1 - p6)

...many of the companies identified above are considerably larger than Cellestis... (Annexure 1 - p35)

And yet, after examining a basket of other takeover targets that he seems uncertain as to whether they are similar to Cellestis or not, he reaches the following conclusion:

we consider a control premium at the lower end of the range to be appropriate for Cellestis

If that was not bad enough, there is more.

Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of a share in Cellestis has not been premised on the existence of a special purchaser. (Annexure 1 - p12)

We probably don't need the IE to make this suggestion for us:

a potential acquirer with an established distribution network could leverage its existing distribution network to increase sales beyond the levels that could currently be achieved by Cellestis. (Annexure 1 - p37)

Qiagen themselves have said that they intend to integrate the Cellestis QuantiFERON technology into their existing diagnostic platforms to increase its value to them.

Clearly, Qiagen anticipate that they will be able to increase the Earnings of Cellestis through synergies. In fact, the ability of Qiagen to make a better fist of managing Cellestis has been a central argument that has been given to us for selling our shares. Obviously the expectation is that Qiagen will achieve a better earnings growth profile than the pessimistic ones that the IE has presented to us.

If the above does not define a "special purchaser" who will increase earnings through synergies then I will turn on the sirens and lights.

As the IE has himself said above, such a purchaser should be willing to pay a higher price for that.

And yet, the IE persists with his use of a control premium at the lower end.

In my next post I will get back to critically examining the mechanics of the IE Valuation.

Vic
Spokesperson
CSAG

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