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Even an optimistic liquidation value estimate fails to support buying Vestas [ClearOnMoney]
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Even an optimistic liquidation value estimate fails to support buying Vestas

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Commentary

Even an optimistic liquidation value estimate fails to support buying Vestas

9 Jan 2012 by Jim Fickett.

First off, in my earlier post – Vestas, beaten down, may be a bargain – there was an error. The stock prices I quoted were in Danish Krone, not US dollars. This does not change the main point, that the stock is down 92% from its recent high.

Since the stock price has fallen precipitously, there are rumors, naturally, of a takeover. When a company is taken over, it is sometimes managed as an independent going concern within a conglomerate. Probably more often, it is slowly dismembered, with some sites being disposed of, many employees and customers leaving, and processes gradually abandoned and replaced with those of the parent company. In my view, then, a conservative valuation for a company that may be taken over is the liquidation value, but a relatively optimistic liquidation value, as the liquidation will not be a fire sale.

In an earlier post, I used average discounts for assets, in calculating liquidation value, as given by Graham and Dodd. Using instead the optimistic end of the range of discounts they suggest, the calculation runs as follows (all data from the 2010 annual report; amounts in millions of euros; capitalized costs of software and R&D projects included in plant and equipment):

  • Cash and marketable securities at 100% – 339
  • Receivables at 90% – 834
  • Inventory at 75% – 2052
  • Plant and equipment at 50% – 1209
  • Total liabilities at 100% – 4312

That gives a liquidation value of 122 million euros or, with 204 million shares outstanding, €0.60/share. That compares with the current market price of about €8.00/share.

To be clear, the above liquidation value is my estimate of what Vestas would actually be worth to, say, GE, if GE were to allow those currently in charge of their own wind energy work to follow the instincts that typically guide office politics. No doubt if GE or some other large company does actually make an offer, it will be higher than this liquidation value. But I know of no rational way to make an estimate of what that offer might be. This calculation, at least, fails to support buying the stock at its present price on speculation of a takeover.