Re Southern Counties Fresh Foods Ltd

The court conducted a further valuation hearing following earlier Main and Supplemental judgments to resolve outstanding valuation adjustments and two new applications by the petitioner (CIL): fresh evidence about RWM's bone-in cow trade, and an amendment seeking interest-equivalent compensation on the unpaid purchase price. The judge determined valuation items necessary to produce a fair price between the parties, applying the agreed EBITDA/multiple methodology but making adjustments for the SBO (rendering cost) recharge, recharges for staff and operating costs, rent review and insurance, the EBITDA multiple, an intercompany debt from SCS, a working-capital shortfall caused by late payment of RWM invoices, and the treatment of the bone-in cow trade.

• The court allowed a 75% chance adjustment to the SBO/kickback figure and applied that as an EBITDA adjustment.
• It held that RWM recharges may be set off against items impacting operating profit but not against rent increases or insurance premiums; rent review and insurance increases must be brought into account.
• The EBITDA multiple was fixed at 5x.
• The £318k receivable from SCS at the valuation date was treated as a surplus asset to be brought into account.
• The working capital adjustment added the whole overdue debtor amount of £5.669m but allowed a £375k deduction for capital expenditure needs.
• The court awarded compensation equivalent to interest under the Companies Act 2006 s.996, at 2.5% simple interest from 24 February 2009.
• On the bone-in cow trade, the court allowed compensation up to the valuation date and treated an on-going, post-Valuation Date profitable bone-in trade as properly includable in maintainable earnings but rejected extreme heads that assumed SCFF would have captured all cow supplies or that all cows would have been available to SCFF.

This was a five-day further hearing to resolve valuation issues left outstanding after the judge's earlier Main Judgment (20 November 2008) and Supplemental Judgment (17 June 2009). The petitioner, Cobden Investments Limited (CIL), sought (i) resolution of expert disagreement on a range of valuation adjustments to the EBITDA/multiple valuation of Southern Counties Fresh Foods Limited (SCFF) and (ii) permission to rely on newly discovered evidence concerning RWM's trade in bone-in cows and, by amendment, a claim for compensation equivalent to interest on the unpaid purchase price under Companies Act 2006 s.996.

Key factual and procedural background: the valuation was being undertaken in the context of share purchase relief following an unfair prejudice petition. The parties' valuation experts disagreed on several adjustments: the SBO (rendering) recharge (the so-called "kickback"), whether cross-recharges should be set off against rent review and insurance, the appropriate EBITDA multiple in light of market movement, whether an intercompany balance due from SCS was a surplus asset, the working capital effect of substantial late payments by RWM and RWM Dorset, and whether profits from RWM's bone-in cow trade should be reflected in SCFF's maintainable earnings.

The court framed the principal issues as:

• whether and how to adjust EBITDA to reflect the likely outcome of hypothetical renegotiation of the MoU and termination of the SBO recharge;
• whether RWM recharges should be set off against rent review and insurance increases;
• the appropriate EBITDA multiple reflecting market conditions;
• whether the £318k receivable from SCS is a surplus asset;
• the correct working capital adjustment given rolling late payments totalling £5.669m and any necessary allowance for capital expenditure;
• whether to allow compensation equivalent to interest under s.996 on unpaid purchase price and, if so, from what date and at what rate; and
• whether newly discovered evidence about RWM's bone-in cow trade required re-opening valuation assumptions and the extent to which such trade should be included in maintainable earnings.

Reasoning and decisions:

• On the SBO/kickback, the judge rejected an approach that entirely discounts the prospect of successful renegotiation. Weighing expert evidence and the Main Judgment findings, he adopted a chance-weighted approach analogous to loss-of-chance reasoning and allowed an adjustment equal to 75% of CIL's expert figure (£259,000 as at 4 January 2009).
• On recharges, the court distinguished items affecting trading profit (which could be set off) from rent review and insurance (which must be brought into account without set-off) to avoid undermining the concept of a fair trading profit.
• The EBITDA multiple was fixed at 5x, adopting the petitioner’s expert approach and preferring the Private Company Price Index indicators over broader FTSE food indices.
• The £318k due from SCS was held to be a surplus asset and to be added to equity value in the same manner as other surplus asset items.
• On working capital, the judge accepted the petitioner’s methodology of adding the full £5.669m overdue debtor position to Enterprise Value but allowed a pragmatic deduction for immediate and near-term capital expenditure of £375k (consisting of 2009 spend of £150k and immediate need of c. £225k), thereby reducing the net working-capital addition.
• The court exercised its s.996 power to award compensation equivalent to interest and ordered simple interest at 2.5% per annum from 24 February 2009 (the date directors resigned and CIL transferred the shares), finding it fair because the purchaser had enjoyed the shares and control without paying the full price.
• On the bone-in trade, having considered fresh witness material showing RWM had traded bone-in cows to QK Meats beyond dates previously asserted, the judge allowed compensation up to the Valuation Date and held that ongoing profitable bone-in trade should be brought into maintainable earnings. He treated that trade as a separate income stream for valuation and applied a 2.5x multiplier to it (allowing salary and on-costs deductions), but refused more extreme heads of relief that assumed SCFF would have captured all cow supply or markets.

The judge recorded findings on experts’ demeanour and reliability and applied a fairness-focused approach to produce a valuation outcome that, in his view, was equitable between CIL and the RWM purchaser.

Application allowed in part. The court resolved outstanding valuation issues by (i) applying a 75% chance-weighted adjustment to the SBO/kickback figure (75% of £259,000), (ii) holding that RWM recharges may be set off only against operating items and not against rent review or insurance (those must be brought into account), (iii) fixing the EBITDA multiple at 5x, (iv) treating the £318k SCS intercompany receivable as a surplus asset, (v) adding the full overdue debtor sum £5.669m as a working-capital adjustment but allowing a £375k deduction for CAPEX, (vi) awarding compensation equivalent to interest under Companies Act 2006 s.996 at 2.5% simple from 24 February 2009, and (vii) allowing compensation up to the valuation date for RWM’s bone-in trade and including an on-going bone-in trade in maintainable earnings with a separate multiplier of 2.5x and appropriate cost deductions, while refusing the more extreme speculative heads seeking to ascribe all cow supplies to SCFF. These determinations were made to achieve a fair value between the parties and to reflect the court's assessment of the evidence and appropriate valuation methodology.