It appears that the purchase of 100% of the ordinary shares of Helicopters NZ on 28th Feb 2010 by South Canterbury Finance for $90.25m may have consisted of net tangible assets of minus $51m, and goodwill of $141.25m. This is based on the following figures:
Helicopters NZ fleet, as at 30 June 2010 worth a claimed US$111m
Exchange rate of 69.81USc/NZD as at 28 Feb 2010
Gives fleet value in NZD of 159m as at 28 Feb 2010
Less $71m of Helicopter equipment owned by SCF and leased to HNZ (see note 26 of 31 Dec 2009 accounts)
This gives a value of the identifiable assets of Helicopters NZ of $88m.
Subtracting from this the $20m in preference shares and $119m in loans (see p 3 of my complaint for the working) from SCF gives a net tangible assets on the ordinary shares of minus $51m. Goodwill on consolidating the investment into SCF group is worked out as $90.25m purchase price less minus $51m in identifiable net assets ($90.25m- - 51m = $141.25m). For simplicity I've assumed that the fleet is the only asset, that SCF's loans are the only debts, and that the values have not changed between the end of February and the end of June, and that the total exposures figure just counts the loans rather than the equity investments in HNZ.
Quite how subtracting $51m in tangible assets from the group (not counting the $10m cash paid) can remedy the breach of clause 16.1(c) by augmenting 'Total Other Tangible Assets' is another story. By making Helicopters NZ a non-charging subsidiary, it is not required to be consolidated for the purposes of testing the financial covenants, and leaves the shareholding as an equity investment which is counted as a tangible asset.
So the overall effect of the scheme, if my inferences and calculations are correct, is to count what is goodwill for financial reporting purposes, as a tangible asset for the purposes of the trust deed. It also enables Helicopters NZ to borrow money ranked ahead of SCF, without it counting as a prior charge security.
The business is now on the market as a going concern, so, about a year after it was valued for the purpose of a related party transaction, its value will be market-tested. My guess is that the goodwill in the business next time it is sold will be a lot less than $141.25m -- my guess would be more like zero or less.
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7 comments:
You sure you know how accounting actually works?
What about the other assets a company would have in its balance sheet that also contribute to net assets? Things like receivables, both short and long? What about cash? Investments in other companies? How about inventories such as parts?
All you are doing is focusing on one number, being the market value of the helicopters, and assuming that the company has no other assets at all...
Also goodwill under IFRS has to be valued using DCF based on identifiable cash flows, and for the acquirer it would have to value HNZ under IFRS straight away... It just can't be manufactured as you claim out of thin air; it has to be based on tangible information and assumptions.
I would expect that E&Y would have given this a very thorough going over, not to mention the RB and Treasury.
I very much doubt what you claim to have found actually exists.
HTG, as always, thanks for commenting. Of course HNZ has other assets and liabilities, the purpose of the post is show what happened, and to estimate, however crudely, the numbers. So, I note that you're not disputing the analysis, only the numbers.
When I studied accounting, which was not that long ago, goodwill on acquisition under IFRS was the difference between the fair value of the identifiable net assets and the consideration paid. DCF may be used to assess impairment of goodwill at balance date or if some other significant event happens.
The value placed on HNZ was derived from a valuation done on SCF's behalf, but the basis of it and its working and assumptions have not been released. E&Y do not appear to have given it a very thourough going over, and their mandate from the trustee was limited to the value of the asset rather than the impact of the transaction, and distinction I've emphasized before. I think there is an audit failure on E & Y's part, actually. By the time the Helicopters NZ transaction is fully unwound, and all the assets and liabilities are fully realised the values put on the assets and the amount of capital booked will be shown to be a joke. I'm expecting that the value recovered from the Helicopters NZ and Scales corp assets will be less than the debts and preference shares they collectively had, and that Southbury Corp and Southbury Group receiverships will produce zero to 10 c in the dollar.
Well obviously, if L is greater than A then E is negative - that's one of the financial 'laws of gravity', if you like...
But I do dispute your analysis. for one thing you are using balance date numbers that are 8 months before the transaction date so it is quite possible that the settlement balance sheet has some significant differences between it and the June balance sheet.
An exchange rate movement may not be enough to create the goodwill you seem to think is there... Also the flyer for the sale of HNZ talks about market value, which is not the same thing as book value.
SCF had to account under IFRS but Southbury probably didn't, which means that there could well be a difference between the two. How this works is unknown because the information is not public...
I still smell a storm in a teacup here. As it is the only loser in any differences would be the shareholder and the Treasury view that it made no difference to their liability is essentially correct. So by all accounts all you are doing here is flogging a dead horse...
HTG,I'm thinking of making a new post for you that includes a crash course in finacial reporting requirements, and how they would apply for Helicopters NZ and Southbury Group and Southbury Corp.
I don't thing this is a small issue, the Securities Commission have confirmed they're looking into the accounting for the transaction and the disclosure of the transaction.
Gee.. you really know how to encourage comments on your blog... thanks for the insult...
I'm not drinking your Kool-aid... and I won't be stopping by again...
BTW.. the Securities Commission is looking at everyone and everything... they are going out with a bang... Just because someone is looking doesn't infer guilt, although most of the commentators on blog would prefer to shot first and ask questions later..
Goodbye.
David, It would be fair to say helicopter values have only gone one way in the last 18 months, down. Ask any helicopter owner. While there maybe other assets within HNZ, in the order of all things the helicopters will be the major assets of the organization.
It appears that the $119m SCF loans figure was way out. The numbers don't add up or make sense. If exposures include equity and debt, the figure is more than $119m (i.e. 90.25m ordinary share equity + $20m preference share equity is $120.25m, not counting loans the company expressly refers to and in a document released yesterday were stated as $17m. Also, earlier documents give different results, e.g. 50.9% of $259.2m (the figures when the transaction was done and before the accounts were audited) gives 131.9m whereas 57.6% of $206.6m from the audited accounts gives $119m.
However, when you include third party finance sources, the figures get back to a huge amount of goodwill being booked for financial reporting purposes, confirming what Neil Pavour-Smith told me: Scales and Helicopters NZ ordinary shares had bugger all book value.
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