Valuing a Brand Bought from the Promoter
Veda Wellness Ltd (VWL), listed, is 56.8% promoter-held. It proposes to buy the 'Sattva' brand - 42 trademark registrations, 19 formulations and a distribution network - from Sattva Consumer Care Ltd (SCC), a promoter-group company, for Rs 615 crore, paid by allotting 4.10 crore VWL shares at Rs 150 each. VWL's 26-week average of weekly high and low is Rs 158; the two-week average is Rs 139; the price fell from Rs 178 after a profit warning. The registered valuer used only the relief-from-royalty method: royalty of 4% of SCC's FY24 sales of Rs 780 crore, growth of 14% for eight years, WACC of 13.2%, tapering to 2% by year ten, over a 20-year life. The report contains no DCF, no comparable royalty benchmarks and no impairment assessment for the Rs 402 crore of goodwill that will arise. SCC sells 71% of its output to VWL under contract manufacturing, and VWL spends Rs 96 crore a year marketing the brand. The audit committee met for 25 minutes and 'noted' the report. The board wants the EGM notice issued this week.
1. Is a single relief-from-royalty valuation defensible for these intangibles? What must the valuer address before the report can support a board recommendation?
Read the worked answer
Relief-from-royalty is a recognised income-approach method for a brand and is defensible in principle where the asset could be licensed. It is not defensible as the sole method here, for four reasons.
Circularity from related-party sales. Seventy-one per cent of SCC's revenue comes from VWL, and VWL spends Rs 96 crore a year building the brand. Applying a 4% royalty to those sales capitalises value that VWL itself creates and pays for. The valuer must either exclude related-party sales from the royalty base or run a with-and-without analysis at VWL's level.
Unsupported royalty rate. Four per cent must be benchmarked against third-party ayurveda and FMCG licence comparables and tested against a profit-split, since the royalty rate is the single most sensitive input.
No triangulation. A market approach (comparable brand transactions) or a multi-period excess earnings method should be run and the difference explained.
Life and tax. Twenty years is asserted, not justified, against a renewable trademark; the tax amortisation benefit must be dealt with explicitly.
Finally, the Rs 402 crore goodwill must be allocated to cash-generating units and tested annually under Ind AS 36; an indefinite-life intangible is not amortised but is impairment-tested, and a 20-year amortisation schedule would be inconsistent with that election.
2. Is Rs 150 a lawful issue price for the preferential allotment, and what approvals and disclosures are required?
Read the worked answer
No. Under Regulation 164 of the ICDR Regulations the floor price is the higher of the average of the weekly high and low of the closing prices over the 26 weeks preceding the relevant date and the average over the two weeks preceding it. Here that is the higher of Rs 158 and Rs 139 - Rs 158. The relevant date is 30 days before the shareholders' meeting. Issuing at Rs 150 is below the floor and the allotment would be invalid; the price must be revised upward or the resolution withdrawn and re-notified with a fresh relevant date. The post-warning fall is irrelevant; the two-week average does not displace the 26-week average, it only sets an alternative floor.
Approvals:
- Board approval and a special resolution under section 62(1)(c), with the explanatory statement carrying the disclosures required for preferential offers.
- Compliance with section 42 and the Companies (Prospectus and Allotment of Securities) Rules, including a registered valuer's report under Rule 13.
- ICDR lock-in on the allotted shares and the promoter's pre-preferential holding under Regulation 167.
- If the shares are issued to a promoter group entity against a non-cash consideration, the valuation of the asset and the pricing of the shares are two separate tests and both must be satisfied.
The gap between the Rs 615 crore consideration and the value of the asset will be goodwill, not a plug; the board should be told that a share-financed purchase at a price below the ICDR floor transfers value from the promoter to the public, which is the reverse of the usual concern and will attract scrutiny.
3. Analyse the related-party, audit committee and takeover consequences of the transaction as structured.
Read the worked answer
Related party. The purchase is from a promoter-group company. Section 188 covers sale or purchase of goods or materials, and an intangible asset may fall within 'goods'; in any event Regulation 23 of the LODR Regulations covers transfer of resources, services or obligations between related parties and applies squarely. Because Rs 615 crore exceeds the section 188 threshold (10% of turnover or Rs 100 crore, whichever is lower), a prior ordinary resolution is needed with related parties abstaining, preceded by audit committee approval. Regulation 23(4) requires the same abstention at the LODR level.
Audit committee. A 25-minute 'noted' will not satisfy either the LODR or section 177. The committee must record the methodology, the related-party circularity, the sensitivity of value to the royalty rate and the asset's standalone realisable value, and should obtain a second independent opinion; the board should minute why it accepted the report.
Takeover. SCC's 9.3% takes the promoter group from 56.8% to 66.1%. That is an acquisition of more than 5% in a financial year by a holder above 25%, so Regulation 3(2) is engaged unless an exemption applies. The preferential-allotment exemption under Regulation 10(4) is conditional and cannot be assumed; the safe course is a specific exemption application under Regulation 11 or an open offer. Note also that a 26% offer would push the group to 92.1%, above the 75% maximum non-public shareholding, so the offer size would have to be cut to leave a 25% public float.