When the Government of Belize issued an order assuming public control of Belize Telemedia in August 2009, the former shareholders, Dunkeld International Investment Limited, requested arbitration under United Nations Commission on International Trade Law (UNCITRAL) rules to determine the compensation payable for the transfer of ownership to the government. Following a settlement between the parties in 2015, the tribunal was restricted to ruling on matters of quantum in relation to the acquisition of Telemedia.

Counsel for the defendant retained Dr. Richard Hern, Managing Director in NERA’s London office, to submit to the tribunal an expert report on the fair market value of Telemedia when the acquisition occurred. Dr. Hern presented a discounted cash flow (DCF) approach to determining the fair market value of the company. Dr. Hern’s analysis was primarily a “top down” approach, based on the use of a management business plan to forecast cash flows, adjusted for any systematic management bias observable in historical business plans. Although Dr. Hern considered the use of market multiples to determine fair market value, he rejected it for this case on the grounds that there were no good comparators for Telemedia.

Dr. Hern determined a fair market value of BZ$1.44 per share. This valuation assumed that the “Accommodation Agreement,” an agreement between Telemedia and the government affording certain protections to Telemedia’s investments, did not hold. Dr. Hern calculated that including the effect of the Accommodation Agreement would result in a fair market value of BZ$4.47 per share.

Counsel for the claimant retained an opposing expert to provide an expert report on the fair market value. The opposing expert also employed a DCF approach but based cash flow projections on a “bottom up” forecast of each business segment using market benchmarks. The opposing expert’s DCF valuation was supported with evidence on market multiples. The claimant’s expert determined a fair market value of BZ$10.23 per share, assuming the Accommodation Agreement held.

In its decision on quantum, the tribunal stated that it “prefers the ‘top down’ model developed by the Respondent as a starting point for its own conclusions.” The tribunal determined a fair market value of BZ$5.65 per share, closer to Dr. Hern’s calculation of BZ$4.47 per share than the opposing expert’s calculation of BZ$10.23 per share. As reported in breakingbelizenews.com, the decision was regarded as a win by the government, as it reduced the total value payable by 45% relative to the claimant’s demands.

The case has important implications for international arbitration cases where a DCF model is used to determine the damages. For DCF valuations where good comparators are not available for forecasting business performance, the management business plan may be a more useful reference point. Internal management may provide valuable insight into country-specific factors that data for comparators may not capture. The decision also shows that a market-based approach to valuation is inappropriate where good comparators cannot be identified, and in such cases, an income approach, based on a DCF, is a more appropriate primary valuation method.

More information on this case can be found here.