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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Estera Trust (Jersey) Ltd & Anor v Singh & Ors  EWHC 873 (Ch) (08 April 2019)
Cite as:  EWHC 873 (Ch)
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Strand, London, WC2A 2LL
B e f o r e :
| (1) ESTERA TRUST (JERSEY) LIMITED
(a company incorporated under the Laws of Jersey)
(2) HERINDER SINGH
|- and –
|(1) JASMINDER SINGH
(2) VERITE TRUST COMPANY LIMITED
(a company incorporated under the Laws of Jersey)
(3) JEMMA TRUST COMPANY LIMITED
(a company incorporated under the Laws of Jersey)
(4) EDWARDIAN GROUP LIMITED
(5) JASMINDER SINGH AND HERINDER SINGH
(as trustees of the English Trusts)
Mr Ian Croxford Q.C. Mr Daniel Lightman Q.C. and Ms Emma Hargreaves (instructed by Orrick, Herrington & Sutcliffe LLP) for the First Respondent
Mr Andrew Green Q.C. and Mr Fraser Campbell (instructed by Baker & McKenzie LLP) for the Fourth Respondent
Hearing dates: 28, 29, 30, 31 January, 1, 5, 6, 7, 8, 11 February 2019
Crown Copyright ©
Mr Justice Fancourt:
This judgment comprises the following sections:
1. Introduction (paras 1-6)
2. Basis of Calculation of Price (paras 7-13)
3. The Issues (paras 14-17)
4. The Hotel Valuations (paras 18-54)
5. Portfolio Premium (paras 55-70)
6. Company Assets (paras 71-89)
7. The Share Valuations (paras 90-126)
8. The Price (paras 127, 128)
9. Terms of payment (paras 129-145)
See also the spreadsheetappended to this judgment
i) the market value of HS's and Estera's combined holding ("A");
ii) the value of JS's holding, taking into account his interest in and ability to influence the Second and Third Respondents and their holding ("B");
iii) the value of an aggregate holding comprising JS's, HS's and Estera's shares held by JS, taking into account his interest in and ability to influence the Second and Third Respondents and their holding ("C").
The price payable by JS and the Company will be A plus one-half of C-(A+B).
2. Basis of calculation of price
"Even if (which is untested) there is a market for HS's and Estera's shares, to adopt the depressed market value for the shares is not, for the reasons that I have given, a fair basis of valuation. A fair basis would in my judgment be the price that would be likely to be agreed between commercially-minded but reasonable persons in the actual positions of HS and JS in notional arm's length negotiations, having regard to any marriage value that would be released on such a sale and purchase. In my judgment, that price would be the market value of HS's and Estera's shares plus 50% of any marriage value that would result from adding those shares to the existing holding of JS. Although JS is himself a minority shareholder, he is the CEO of the Company, has effective control of the board of the Company and, together with the Jasminder trusts, has voting control of the Company in general meeting. The acquisition of HS's and Estera's holdings will result in JS and the Jasminder trusts together having total control of the Company, taking their combined holdings above 75%. The share valuations should in my judgment proceed on that assumption, since that is the reality of the way in which JS and the Jasminder trusts are able to control the Company. That is so even though Verite and Jemma have professional duties as trustees to the whole class of beneficiaries of the Jasminder trusts, not just JS. They are required to have regard to JS's wishes, which have since 1998 included treating the English and Jersey trusts' shares as one voting block of shares, and otherwise having regard to JS's wishes."
3. The issues
i) whether a "portfolio premium" of 10% should be added to the aggregate of the values of the individual hotels, as the Petitioners' expert contends;
ii) the appropriate level of income and expense projections for the individual hotels in the portfolio;
iii) the appropriate capitalisation rate to apply to the net income of each of the hotels, and
iv) the appropriate projections and finance interest rate to be used in valuing a development project for a new hotel in Leicester Square.
Of these, the portfolio premium issue forms the majority of the difference between the hotel valuers. Ignoring the premium, the Petitioners' valuer's aggregate valuation of the hotels is £1,278,000,000. The difference between that figure and the Respondents' valuation of £1,210,600,000 is marginally over 5%, which the expert valuers agree in their joint statement to be within a reasonable range of generally accepted valuation tolerance. In other words, neither valuer would (or did) say that the other's aggregate valuation (ignoring the portfolio premium) was unreasonable in amount.
i) whether a deduction of £30 million should be made from the cash assets of the Company because that amount of cash is needed for working capital or as an appropriate cash reserve for the Company's business;
ii) the discount from a pro rata share of the equity of the Company that is appropriate to reflect the market value of a minority shareholding of 19.89% in the Company (the A tranche);
iii) whether a premium or a small discount to pro rata value is appropriate in valuing the B and C tranches.
4. The hotel valuations
I will consider first the valuation of the hotels. The principal assets of the Company are its hotels. At the valuation date there were 12 trading hotels: nine in central London, one near Canary Wharf, one at Heathrow airport and one in Manchester. The Company also owned the Theatre Royal in Manchester and had assembled a development site in Leicester Square, for which detailed planning permission had been granted in May 2014, shortly before the valuation date. The valuations of the individual assets and the differences between the opinions of the expert hotel valuers are shown on the following table:
|Property Name||Mr Stoyle (for Ps)||Mr Craggs (for R1)||Variance|
|Trading Hotels||Trading Hotels||Trading Hotels||Trading Hotels|
|New Providence Wharf||£40,000,000||£40,200,000||£200,000|
|Leicester Square Site||£123,000,000||£103,800,000||-£19,200,000|
|Theatre Royal||Not valued||£4,500,000||N/A|
|Portfolio premium or discount?||10.00% premium||0.00%|
"The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion."
i) Market conditions at the valuation date;
ii) The values of the hotels as reported in the annual financial statements of the Group as at 31 December 2013;
iii) Available management accounts for the first six months of 2014;
iv) The reports of CBRE used for the 2013 accounts (these were Red Book valuations of the hotel assets conducted by CBRE at a valuation date of May 2013);
v) What if any adjustments should be made to the values reported in the 2013 accounts;
vi) In particular what adjustment should be made to the value shown for the Leicester Square site given that planning permission had been granted since the date of the accounts;
vii) What if any adjustment should be made to reflect the underlying business operations of the Group.
i) It is not appropriate, as both experts agreed, to focus intently on one input into a profits valuation and treat it as being "the difference" in the final value, at least where there are differences in other inputs too. A profits valuation, supported by a discounted cash flow model, is a balanced exercise, requiring careful judgment on the part of the valuer about the selection of all inputs. A small adjustment to one input alone can make a substantial difference to the valuation. Both experts said that they would and did cross-check against other valuation measures, such as price per room or price per square foot.
ii) In most cases, there is only a small difference between the respective experts' individual hotel valuations. In property valuations, unless there are very close comparables on which to rely, a divergence of up to 10% is often not an unreasonably wide range of values. The experts acknowledge this in their joint statement. They are in most cases within 5% of each other, which for a complex hotel valuation is very close.
i) There was a distinct improvement in market conditions in 2014. I accept Mr Stoyle's evidence that this was marked and was affecting sentiment in June 2014. The predictions at the time were for strong growth in 2014 and 2015. I accept Mr Stoyle's opinion that the market was optimistic at the Valuation Date.
ii) I also accept that market sentiment is important and can have a significant effect on purchasers, making them more eager to buy, more optimistic in their forecasts and accordingly more generous in their bids. Mr Stoyle, I consider, has a better feel than Mr Craggs for the way in which the market operates, owing to his agency experience. Although Mr Stoyle made some mistakes with the technical aspects of his expert reports and Mr Craggs's reports were more polished and technically more precise, feel for the way in which the market operates is important when seeking to identify value at a particular point in time, particularly where there are few good comparables.
iii) I accept the evidence of Mr Stoyle that there was likely to be strong demand for these hotels if marketed individually. There would very likely have been competition for them, or at least the perception on the part of would-be purchasers that they were in a competitive market. Mr Stoyle considered that hotel owner-operators would be likely to have an optimistic mindset about their ability to achieve better results. I am persuaded by that evidence, particularly at a time of strong market growth. I accept that those bidding for hotels would not feel confined by the Company's historic results but would formulate their own predictions.
iv) Although I accept Mr Craggs's evidence that in many cases a purchaser will look to spend money to improve what the hotel offers, or to re-brand it, it is very difficult to predict what a purchaser will do. There can be a great difference in approach between different hoteliers as regards "aggressive" capex, designed to raise the quality of the hotel. Making a specific capex allowance above the standard 4% FF&E allowance is therefore necessarily speculative. Mr Craggs accepted that it was a matter of judgment for an individual hotelier. Since, with very few exceptions, the standard of the hotels was high and there was no obvious need for "defensive" capex to maintain existing standards, I consider that Mr Stoyle's approach of not using capex to justify higher future growth is better, and that his assessment of future net operating income is generally reliable, albeit at the higher, optimistic end of the scale.
v) Mr Stoyle took careful account of the 2013 CBRE valuation, as the instructions to the expert valuers required, and his hotel valuations generally fit well within the pattern of valuations, starting with Mr Craggs's December 2011 valuations, then CBRE's May 2013 valuation, and ending with Mr Craggs' own December 2015 valuations of the hotels (other than Leicester Square). Although the graphs Mr Stoyle used to seek to demonstrate the steadily upwards trend of values were faulty in various respects, the trend is established by the values. There are individual exceptions, such as the Heathrow hotel, where values have been affected by significantly increased competition since 2011. Subject to that, in the case of the hotels where the variance between the two experts was greatest, Mr Stoyle's valuations are very much in line with the increasing trend of value.
vi) Mr Craggs took a more blinkered, or purist, approach in his valuations. He did not consider CBRE's valuations except for the purpose of extracting any indications of the physical condition of the hotels in 2013, and he did not have any regard to his 2011 or 2015 valuations. He considered, rightly, that any events that happened after the valuation date were irrelevant to his valuation. He considered that this precluded him from reviewing (in the sense of standing back from and assessing) the values that he obtained as at the Valuation Date in the light of his other valuations and CBRE's valuation. In this respect I consider that he went too far. First, as already identified in relation to Leicester Square, he did not ask himself what material would have been available on the Valuation Date if the hotels had been appropriately marketed prior to that date; he only used such documents as were in fact available on that date, when in the real world no marketing had taken place. Second, although he was doubtless right to ignore his earlier and later valuations in the first place, to enable him to reach a provisional view on June 2014 values uninfluenced by other valuations, he should then have stood back and considered, in the light of other valuations available to him, whether he had reached a sound conclusion. That is particularly so as he (like Mr Stoyle) was seeking to value almost 4½ years after the event. It is notoriously more difficult in retrospect to capture the state of the market at a much earlier time. Both valuers had the benefit of top quality contemporaneous valuations before and after the Valuation Date, prepared for the Company's lenders, which established a trend of values. These would have been of assistance to a valuer in considering whether he had reached sound conclusions. I consider that Mr Craggs, acting as an independent witness whose primary duty was to assist the court, should have asked himself whether his values sat comfortably with these other valuations, particularly as two of them were his own valuations. That is of some importance, when instructed on behalf of one side in vigorously contested litigation where there is always a risk of some subconscious bias towards that side. Mr Craggs reached values that were (generally) the same as or (in aggregate) lower than his 2011 values, lower than CBRE's 2013 values, and substantially lower than his 2015 values. That is not to say that Mr Craggs's 2014 values were unreasonable but that, as part of the process of sense-checking his values and standing back from the technicality of the discounted cash flows and the residual valuation, he should have asked himself questions about why his 2014 values did not fit very well into the proven trend of values.
vii) Although December 2015 was 18 months after the Valuation Date, during which there had been continued growth in the market, though at a much reduced rate in 2015, there was no significant financial, economic or political change that would in itself explain a substantial difference in values from June 2014. In fact, Mr Craggs's 2015 values are significantly higher, more than 10% higher in aggregate. Mr Craggs stresses in his report that there are always factors that affect individual properties and their values and that values do not move in a linear fashion, which is doubtless correct; but on the other hand he does not identify any particular factors relating to particular hotels that explain the substantial difference between 2014 and 2015 values.
viii) The concern that Mr Craggs did not sufficiently stand back and review is especially acute in the case of Leicester Square, where his valuation for the bank was at a date only 6 months after the Valuation Date, and where various assumptions were required to be made as inputs into a residual valuation – a technique that, as both valuers accepted, is particularly sensitive to small changes in such inputs. Had Mr Craggs considered how in his January 2015 valuation he arrived at a value of £126 million whereas he now valued at £103.8 million, he might have asked why he was using a markedly higher finance rate and questioned whether what his experience told him (or his colleague had said) in 2018 was right, and whether his projections were too conservative compared with what he had considered to be appropriate in January 2015. One difference was that Mr Craggs valued the 360-bedroom scheme at the earlier date, and it is fair to record that on Mr Stoyle's equivalent valuation (using the figure for construction costs that Mr Craggs took) this reduces the land value by £3m, compared with the 350-bedroom scheme. But this on its own does not explain why there is such a substantial difference between Mr Craggs's two valuations.
ix) In my view, Mr Craggs's capitalisation rate of 4.75% for the May Fair hotel was surprisingly high, given that he uses 5% for the Hampshire and that the analysis of the Thistle by Kingsley transaction in 2011 gives an initial yield of 5%. Although the Hampshire is nominally a 5 star hotel, it is of a different quality from the May Fair. One would expect the AAA location of the May Fair to attract a substantially lower capitalisation rate in comparison with such hotels. Mr Craggs accepted in evidence that 4.5% would be a reasonable rate to use, and with this his valuation of the May Fair would increase to £521million, in excess of Mr Stoyle's valuation (though admittedly this was based on some aggressive capex).
x) I was not persuaded by Mr Craggs's comparison with the yields on prime offices. He used this to justify a significant differential between them and the exit yield for the May Fair. As Mr Stoyle explained, an investor in a prime office building and an owner-occupier of a 5 star hotel are very different purchasers. The former is looking for ultra low-risk investment, where the location and quality of the property and strong covenant of the tenant guarantee an income stream that ratchets upwards in time. The latter is buying a business, where the risks are greater but so potentially are the rewards, which can increase on a yearly basis, not just once every five years under a standard commercial rent review clause.
xi) Although, as I have said, Mr Stoyle made some technical and presentational errors in his reports, I considered that his projections and capitalisation rates more accurately capture the tone of the market in June 2014 and the likelihood of keen interest in and competition for the hotels, and that Mr Craggs's figures were a little too conservative. For reasons explained below, I do not consider that Mr Stoyle's opinion about a portfolio premium is such as to damage his credibility as a witness, although in the end I do not accept that there should be any portfolio premium.
5. Portfolio premium
"There is no hard evidence that portfolio premiums were being achieved in the market and it is notoriously difficult to provide an accurate assessment of any premium (or discount) for a group sale. However, investor sentiment would suggest that premium prices have been paid where a group presents a unique opportunity or where there has been a specific opportunity to create a hotel platform and synergistic operational efficiencies." [22.16]
"In my opinion, if a portfolio like this were introduced into the open market as a portfolio opportunity in June 2014 it is possible that a premium of up to 10% could have been achieved. This is due to the weight of investor demand for high value hotel platform, and resultant savings from incorporating the group into an existing portfolio/platform of similar hotels of which there are numerous examples. The subjectivity of this assessment should be noted." [22.19]
At that stage, his opinion was tentatively expressed. In his oral evidence, he firmed up considerably on this tentative opinion, ending up by saying that he was 75% certain that there would be a 10% premium paid for the whole portfolio.
6. Company Assets
i) The market value of each of the hotels
ii) Any other assets and liabilities
iii) Any other factors that, in the opinion of the share valuers, would serve to adjust the price that a reasonable purchaser buying at market value would be willing to pay for the Group, and
iv) The particular adjustments ordered by the Court.
i) A reduction in the cash assets of the Company from £56.8million to £26.8 million;
ii) A reduction in the value of stock from £1.1m to zero;
iii) An increase in the total debt of the Company from £430.9m (being midway between the figures in the 2013 and 2014 accounts) to £434.6m;
iv) The removal of a credit item for loan arrangement fees of £2.1m on the basis that this is not a realisable asset but only a prepayment;
v) The inclusion of an off-balance sheet hedging asset shown in the 2014 accounts as having a value of £200,000.
7. Share valuation
i) the market value of the A tranche;
ii) the value of the B tranche, and
iii) the value of the C tranche.
Valuation of the A Tranche
i) An option pricing model, known as the Finnerty model;
ii) The settlement reached in 2004 between the Company and Mr Gulhati for his 10% minority shareholding in the Company, and
iii) The levels of overall annual return implied by different levels of discount and holding periods.
Having considered the results produced by those methods, and applying his general experience and knowledge, Mr Bezant then identifies a range of 50-70% as being appropriate for the A tranche, and alights on 60% as his best estimate.
i) the opinion of Mr Giles, which appears to be based on flawed methodology, which is published or approved by no one but Mr Giles, and which produces a surprisingly small discount in percentage terms in comparison with other evidence;
ii) the opinion of Mr Bezant, who has made not very convincing use of the academic researches of Dr Finnerty and made assumptions about the basis of the settlement reached between Mr Gulhati and the Singh family that may be incorrect, thereby distorting the discount derived from that transaction, which gives a suggested range of 50-70%;
iii) published general guidance, which is non-specific.
Valuation of the B and C Tranches
8. The Price
9. Terms of Payment