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Whoever pays the banker sets the price
Pricing the transfer
When assets move from one company to another, some value has to be exchanged, or it is just a giveaway. The questions are how much value, and who decides. Investment banks answer with fairness opinions.
Valuation is partly an art. Choosing the comparable companies and the assumptions leaves room to spin the number, and tweaking the discount rate can turn a valuation that came out too low into one that looks better.
Who pays the banker
The banks were being paid by Apollo and TPG, which brought repeat business through buyouts, refinancings, IPOs, and sales, and big fees. A bank may well try to do the right thing, but it also knows another bank would give the firm what it wants. Apollo wanted valuations that let it move crown jewel casinos into the clean company at a favorable price.
The creditors of the operating company, whose assets were being sold, had no fair representation in setting the value. One question in the court cases that followed was whether moving that value into the clean company amounted to fraudulent conveyance. In one instance, the argument was that the payment for the exchange was the operating company no longer having to pay bankruptcy expenses.
How does a fairness opinion work?
A bank studies the asset using comparable companies, past deals, and projected cash flows discounted to today. It then writes that the price is fair from a financial point of view. The board relies on that letter when approving a deal. The letter states its assumptions and the information it was given.
Why does the discount rate move valuations so much?
A discounted cash flow model converts future earnings into today's value using the discount rate. A small change in the rate compounds over many years of projected cash. A lower rate raises the value and a higher rate lowers it. In the simplest perpetuity formula, value equals next year's cash flow divided by the discount rate minus the growth rate.
What makes a transfer a fraudulent conveyance?
Under US bankruptcy and state law, a transfer can be unwound if it was made to hinder creditors, or for less than reasonably equivalent value while the transferor was in financial trouble. A court looks at what the company gave up and what it received. Intent is not always required when value is lacking. Section 548 of the Bankruptcy Code reaches transfers made within two years before filing.
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