Quick question, especially to those who has experience in M&A Valuation or Finance background in Oil and Gas:
“'Does a buyer of a PSC interest pays the seller the value of the crude and other inventories reported on the seller’s balance sheets? How to value such inventory?”
We don’t. We specifically exclude completed inventory. If we do take inventory we assign a 50% discount to book value.
I’ve never valued a PSC interest since they’re not common in North America, but these come up when dealing with refineries or anybody that has to hold fuel inventory. Products are market traded so they’re generally easy to value. At closing you can decide whether of not inventory is included since usually parties don’t care a ton one way or another.
Both of the answers seem to be “No, we don’t take crude oil inventory. If we do take, we’ll pay either @ market value, or at discount 50% of market value, or at cost”
How about other inventories such as unrecovered costs from opex and capex for equipment etc?
We value Equipment, Furniture, and Other Long Term Assets at 20% of value.
This is the art of valuation at work, not really a right answer, it come’s down to specific methodologies followed by a firm.
I love/hate the nickel and diming of random assets while finishing up a deal. When I structured deals, it always included all the random assets. Other people on my team always left it open to nickel and diming.
The negotiation of those values is kinda fun, but it’s really annoying when you’re trying to just get the deal close.
@Dspapo: “always left it open to nickel and diming”, meaning your teammate agree to pay for those inventories (or random assets)? If the Inventory is no longer used (obsolete/deadstock) in the future, what’s the point of paying for those? Any idea to justify the rationale of the payment, in any scenario at all? Just don’t tell me that we pay to make the seller happy and sell to us… with that money I can just say I pay premium for you not because of the inventory but because of the goodwill/synery I expect to get out from this deal.
Need to borrow your huge minds here.
The deals that ended up open to nickel and diming were just the ones where the terms weren’t clear from the onset. So, they’d make an offer like “we’ll pay $x” opposed to something closer to “we’ll pay $x, which includes working capital, rental equipment, and delivery trucks, and excludes real estate and land. We will determine a working capital basket.”
In the open-ended one, the seller can make up their own deal structure in their mind. They can then claim that they thought the $x purchase price ws just for the rental equipment, and the trucks and working capital should be purchased separately. It just makes the negotiation far more difficult if you’re not clear.
Obsolete inventory was always treated the same as the the trash on the street. We’re happy to throw it out for you after the deal closes, but we’re not paying for it. That’s where the working capital basket comes into play. As long as there’s an acceptable level of WC, then let’s worry about something else.