And hopefully you can see my screen.

So, welcome along. My name is Jonathan.

It's great to have all of you in the room.

Um, in the first instance, it would be fantastic if you could grab the materials, and there's a couple of ways you can do that.

So maybe three ways you can do that.

If you jump onto Felix, you can see the address in my browser screen.

Then you can grab the appropriate page there.

And if you look on the very bottom right, there are a couple of files that you can download.

So that's kind of one way you can grab them.

If you look, I think for you, it's in the bottom right of your screen.

You are gonna see a link, a resources link, and if you click on that, you can download the files.

Um, Agata has, uh, posted a a link in the chat box as well. So if you click on that link, that will take you to the materials in the interest of making the session as interactive as possible, rather than just watch me do stuff.

It would be really great if you would download the materials yourself and then we can kind of work along, through those materials together, right? So what I'm gonna do is I'm gonna click on the divestiture modeling workout empty, that's downloaded.

I do actually already have that open.

So if we open that up, you should arrive at a file that looks like this.

There's a welcome sheet and I'm interested in going for the welcome sheet to the workout sheet.

So there's a bunch of workouts, and we're gonna have a look at some of these.

And alongside that kind of in parallel, I'm gonna grab a blank Excel as a kind of scratch pad and just chuck a few ideas around on there that'll help support the work that we are doing.

So it would be great if you could download the file, open it up, and then we're gonna say control and page down a couple of times.

So try and avoid using the mouse where possible.

And that will take us to the workout sheet.

Our topic is divestitures.

So if you think about mergers, it's when you're acquiring a company and how that works, we're kind of unwinding that.

So it's the opposite of that.

And we'll just grab a blank excel as a scratch pad and just have a look at some really basic kind of and a mechanics when we, alongside us thinking about how to divest businesses.

So hopefully that is all good.

We've not got a huge amount of time, so we've got just under an hour now.

And in the interest of expediency, I think I'm gonna, I'm gonna push on, so it'd be great if you can get those materials downloaded.

Okay, what are we looking at so out one says Apple Pie group is disposing of one of its subsidiaries in an all cash deal. Can't click the gain on sale and adjust the group balance sheet to account for the divestitures.

So, so the divestiture, if we're talking about divestitures, I've got a part of my business that maybe is underperforming, or I think it's a distraction, and in some way I wanna offload it. Maybe I just think it's the right time to sell it.

Now the ideal exit route there is to go for a trade sale.

So if I can find a, another entity, what we might refer to as a strategic buyer, and they get excited about the prospect of buying my subsidiary, because they see great synergies there, synergies that they can achieve by maybe closing down the head office.

So realizing selling general and admin synergies or maybe re-engineering the supply chain.

So cog synergies. So they get excited about those synergies.

And as a consequence, you know, if you've got a certain amount of synergies, they might be prepared to pay a premium, over the traded share price or the valuation as we see it.

And so that is an ideal situation, you know, sell the whole thing in one, go receive hopefully some cash for that, uh, receive a premium.

Fantastic. And they're the first examples that we're gonna look at.

But there are of course, other exit routes that we might consider, such as an IPO.

Okay, so we're gonna look at this first example.

Now, before we do that, I'm just gonna grab a blank Excel, and you can do this with me if you want, or you can just kind of watch me do this. And I'm just gonna sort of refresh our understanding of how an acquisition would work in kind of really simple terms how an acquisition would work, because we're gonna reverse that when we're doing our divestitures.

So, let's put a little bit of narrative in column A alt HOW Gonna give that a width of one and column B, alt HOW I'm gonna give that a width of 30.

And we'll put a bit of narrative at the top.

So let's say buyer acquires target, or let's think of a number, we're gonna say 50 million in cash, and we'll put some really kind of basic, numbers in place.

So if I say buyer in column c as a header and then target and, the buyer's gonna definitely have some cash, we're gonna want the buyer to have some cash and some property plant and equipment.

And that will be like really simple example.

That will be our total assets.

I'd like to have that in bold. And then we might have some debt and some share capital and retained earnings, and that'll give us our total liability and equity.

So share capital or common stock if you prefer.

And it seems like a good idea to do a little check, although the numbers will be really, really, really simple.

Let's imagine that the buyer has got cash of a hundred and it's got PP&E of 500.

So alt equals equals total assets of 600.

Perhaps it's got some debt share capital and retained earnings of 200, select three cells, hold down, control, tap, enter, okay, to populate the range you've selected equal equals.

Okay, we're gonna have a target. The target has got no, cash at all.

It's got PP&E of maybe 50.

It's got perhaps no debt just to make things easy and share capital and retained earnings would be 25 each.

And so hopefully what we're seeing is that balancing.

So if you said, right, let's do some consolidation here.

You might say, well, I'm gonna go maybe over to column G.

I'm gonna call this combo.

Could have called it group or consolidation or proforma if you wanted to.

I'm calling it combo. And actually the way I'm gonna look at this three really simple, I'm gonna go to sale for me it's G four, hold down, alt tap equals a couple of times.

I'm gonna sum across the buyer and the target's cash. And then I've, I've got some blank space here and we'll, we'll talk about that in a minute if I copy this down.

So control D, and I'm just gonna copy across the, I copy across the totals and usually I like to just knock the totals out the, the middle here.

Okay? So the point is that, we've got a combo balance sheet.

Now, what I wanna draw your eye to is this cell here, this balance check cell, it balances.

Okay? So I've done this really, really simply.

I've just added across horizontally.

Now I'm gonna kind of look at it, I'm gonna say, you know what Jonathan, we've got the buyer acquires the target.

So the buyer indeed acquires the target, but 50 in cash.

And it kind of feels like, hang on a minute, the buyer's got a hundred million of cash, the target's got nothing.

After they've done the deal, they've got a hundred million of cash that feels wrong.

So it feels like we need to recognize spending that cash.

And so I'm gonna do an adjustment, a DJ adjustment, and I'm gonna say cash.

And I think what we're gonna do is make that equal to minus 50.

So that feels good because now the ending cash feels right.

But if you look at the green sell the check sale down the bottom, that doesn't work.

Okay? It's, it's out of balance.

And I just need to have a think about the accounting equation and, and how we consolidate this business.

So if I say asset equals liability plus equity, what we're gonna do is under the asset, once I acquire the target going, I'm gonna, um, bring onto my balance sheet.

The target property plant and equipment is 50.

Okay? Let's just maybe get rid of these scribbles.

So target PP&E is 50.

I'm also gonna assume responsibility for the target's.

Liabilities. So the debt, and actually in this situation, to make it simple, we've got no debt.

Okay? Now, this is pretty important for going back to the vests working that we're going to have a look at.

When you buy a company, you consolidate its assets and its liabilities, assuming that you have control of, of the business.

And, you don't do anything with the equity.

Yeah, you, you consolidate the assets and liabilities, but not the equity.

What I'm gonna do is put the financing in place.

So I'm gonna say under assets, that cash is gonna go down by 50.

And then if we were balancing this off around that equals sign, we'd say, well, the net change in assets, it goes up by fif 50 of pp, pp and e and down by 50 of cash.

The net change is nothing. And for liability and equity, the net change is also nothing.

So we're all good, but we need to review why in my model, my balance sheet doesn't balance.

And actually it's because the model is kind of built in quite a uniform way whereby it will pick up the buyer and the target's cash and the buyer and the targets, pp and e and the buyer and the targets debt.

But it does, because of that kind of uniformity, pick up the buyer and the target's share capital retained earnings.

And that is wrong because if I grab, let's grab a different color, that is wrong to grab those because you see no consolidation of equity in the accounting equation.

So what I'm gonna do a little adjustment, a DJ little adjustment, I'm gonna say shareholders' equity, and we're gonna zap out the targets.

Shareholders', shareholders' equity, we're gonna grab that and multiply it by minus one, copy that down.

And now that works. So this is really crucial for the divestitures work we're about to have a look at.

When you acquire a company, you acquire a controlling stake in that company and you consolidate it, you do not consolidate the equity.

And if we have hold that in our minds and we go back to the workouts that I asked you to download, workout one says Apple pie group is disposing of one of its subsidiaries in an all cash deal, calculate the gain on sale and adjust a group balance sheet to account for the vestiture taxes paid in arrears.

So I'm gonna just do a few workings down the bottom here. I'm gonna actually create a little bit of extra space to do that.

There's a heading there for gain on sale and we'll, we'll talk about it in a minute, but I'm gonna just insert a few extra rows here and I'm gonna, chuck in some extra headings.

I'm gonna have the subsidiary sale price.

In fact, I could just grab that for above the subsidiary sales price, I'm gonna have the subsidiary net assets, or if you prefer the shareholder's equity because it's the same thing, right? And then we're gonna calculate the accounting gain.

What I also want to do is look at the tax look on the gain, okay? And I think that's as many rows as we need, okay? We may as well just do fill out some of these numbers and do a few workings. Initially, I'm showing you my formula.

The subsidiary sales price is given above it's 250.

The, um, subsidiary net assets or the shareholder's equity, because it's the same number, right, is 110.

So if you look at the assets, they're 70 and the liabilities are 20 and four, sorry, 170.

And the liabilities are 20 and 40. So that's 60.

So 170 minus 60 is 110.

So the equity is the same as the net assets.

And then if you wanted to calculate the gain, I'm gonna pop that in bold.

If we take the sales price that we achieved less the value of the net assets than I'm recognizing a gain of 140.

And we're told here that the tax on the gain is 20%.

So I think we've got a tax on the gain of $28 million.

Okay, let's go and do some ol deconsolidation at the top.

So I think I might quite like to have some I might quite like to have some extra kind of headings here.

So I'm just gonna just knock out the, the description there and copy this out to the right. We'll, we'll create some of our own headings.

So ultimately in column actually let's go out a bit more column I think.

So ultimately in column I, and I'm just thinking about the number of adjustments we need, I'm gonna calculate the group balance sheet excluding the sub, so the group excluding the sub.

Now, to get to the group, excluding the sub, I'm gonna need to make some adjustments.

And the first adjustment I'm gonna make is dcon.

I'm gonna de consolidate the subsidiary.

So if you look at the group numbers, the group numbers include the subsidiary, okay? So when you're looking at the group, it's not the parent as an individual entity, it is the entire group that includes the subsidiary.

And what we're saying is we're gonna sell that subsidiary.

So you could say, Hey, yeah, you know, like the PP&E is gonna be 300 no it isn't gonna be 300, it's 300 at the moment, but living inside that 300, we've got a hundred million of subsidiary PP&E which we're about to sell.

So actually we need to knock that out.

And the same would be true for all the assets and liabilities.

If I say equals, I'm gonna go and grab the subsidiaries asset for any given line, and I'm gonna multiply it by minus one, and I'm gonna copy that down, okay? And I'm gonna do the same for the liabilities.

I'm gonna go and grab the debt and I'm gonna multiply it by minus one, and I'm gonna copy that down.

And you should say, whoa, Jonathan, stop you.

That's definitely wrong because if you look at what I've done, I've, I'm removing the assets, that's all good.

I'm removing the liabilities, that's all good, but I'm, well, I would I be removing the equity because if you remember, when we consolidate a business, we never consolidate the equity, okay? We only consolidate the assets and the liabilities.

So we certainly don't wanna remove that because it was never in there in the first place.

The 300 is just the kind of parent equity within the sub, okay? We probably wanna do some other adjustments just looking at some of the things that are going on down here.

If we are selling the subsidiary, we're gonna receive some cash and we're gonna recognize again, and we're gonna need to recognize some tax as well.

So I'm gonna do three more adjustments.

I'm gonna say a DJ adjustment for cash that we're gonna receive.

I'm gonna say a DJ, I'm gonna recognize the game and a DJ, we're gonna recognize the facts, okay? So these are not difficult adjustments.

If we think about the group's got cash of 100, we're gonna lose 30 because we're selling the subsidiary, but on sale, we're going to achieve a sales price of 250.

So that's gonna be an increase in our cash post, disposal.

And, we're gonna recognize again, so the gain is 140 and typically the gain's gonna get recognized in retained earnings.

Now, if I look at the balance sheet, I actually can't see a line item for retained earnings, but I can see one for equity.

And I understand that retained earnings would sit within equity. It's like a component of equity.

So I think the gain is gonna increase our equity.

Okay? So, we've adjusted for the cash, we've adjusted for the gain.

Now, there is something to do on tax, but I was gonna leave that alone for a minute.

We can come back to that.

If we look at the group excluding the sub, I'm gonna say Alt and equals, to kind of initiate the sum function, I'm gonna go over to the group.

So I just happened to be starting at the top, the group's cash of a hundred comma, and then I'm gonna process these adjustments.

So I would suggest that the group's cash is gonna go down by 30 when we divest the sub.

It's gonna go up by 250 when we receive cash for sale of that sub.

And that's what I'm doing at the moment.

So I think that at the moment the cash balance is gonna be 320.

I'm gonna copy this down. So let's just grab that. And if I hold down control and tap d that will copy it down.

I actually quite like to show the balance sheet totals in bold so they're easy to read and copy those out to the right.

And I usually knock out the numbers in the middle.

So I'm gonna do the same down here for the liability and equity and the, and the check.

I'm gonna copy that out to the right and probably would be prudent for me just to show you some formulas here.

So I'm gonna go to column J and I'm gonna say equals I'm gonna text, okay? And just show you what's going on, right? So what I wanna say at the moment is this balances, okay? And that's great, you know, I'm really happy with that.

So the balance sheet balances we're all good, but I have omitted something.

What we need to think about is the tax on the gain.

And I'll draw to your attention that it says the tax is paid in arrears.

So if you said asset equals liability plus equity, if we were paying tax of 28 million, then our cash would go down by 28 and our retained earnings would go down by 28 because it's an expense, we're gonna call it tax, but we're not paying this in cash, it's paid in arrears.

So it's not a reduction in cash, it is an increase in a liability.

Ideally I'd go for an account called probably something like taxes payable of 28.

But a quick review of the balance sheet confirms that there is no taxes payable liability, we've got operating liability and tax is usually considered to be an operating item.

So I think I'm gonna chuck it there.

What it means is that the operating liabilities is gonna go, are gonna go up by 28, and the equity, which has retained earnings sitting inside it gonna go down by 28, which brings it into balance or back into balance as it was previously.

So that's a really kind of simple example of a divestiture.

And uh, I think it'd be really interesting to have a look at the next workout because there's some, there's a lot of similarities between workout one and two, but there's some quite specific stuff on tax that we need to talk about.

And I think there's probably an opportunity for us to jump into our scratch pad and just chuck, chuck in some extra workings, and have a bit of a kind of think about, some of the tax implications of things that happen in, in acquisitions and therefore divestitures, right? Let's read the out first.

Fish and chips group is disposing of one of its subsidiaries in an all cash deal, okay? It sounds very similar. Subsidiary has a tax basis that differs from its book basis and that requires a bit of discussion.

Calculate the adjustments and adjust the group balance sheet to the to account for the divestiture.

What I'm gonna do is I'm gonna chuck in a few workings down the bottom and then we'll, once we've done those, we'll need to explain them and we'll go into our scratch pad to go and grab a look at that.

So, let's, let's have a look, see what we've got a little bit further down.

We've got some headings here. I'm just gonna get rid of those and just kind of write out some additional headings.

So I'm gonna, I think insert probably about three lines and may, may insert an extra one in a minute if I need to.

I'm gonna, first of all equals I'm gonna have a look at the subsidiary sales price, which I believe is 250.

And then what I wanna pick up is the subsidiary shareholder's equity.

And this is probably looking very, very familiar thinking back to the previous workout.

And then we're gonna calculate the accounting again.

But I wanna put this, these numbers in because it's nice to kind of compare and contrast what we're doing here versus what we did in the last example.

Let's just show the formulas because you are, I'm sure gonna want to know what's going on.

So there's our accounting game.

Now we need to talk about this tax basis, book basis thing shortly, but I'm gonna again go for the subsidiary sales price, which again is 250.

And now I'm gonna look at the subsidiary tax basis, which is given us 40.

Just note that the shareholder's equity, which you might refer to as the book basis and the tax basis are not equal.

And we need to talk about that and the implications that might have.

I think we're probably gonna end up having an extra line.

So we're gonna set one more line here.

Let's look at the taxable gain.

So the taxable gain would be the two 15 minus the 40.

And let's look at the tax on the gain.

Tax on the gain. Looks like the tax rate is 20% and we've got a taxable gain of 210, an upsetting 210. So we've got, a fortune million of tax.

Now the question is, hang on a minute, what is the deal here? Is the gain 140 or is it 210? And, uh, where's the 40 come from? Where does the 110 come from? Now before we start filling out the, the balance sheet and working through this, I'm gonna go back to my scratch pad and we're gonna use the same numbers that we've already created.

Let's just get rid of the inking here, but we're just gonna flesh these out a little bit.

So the first thing I'm gonna do is I'm gonna say buyer acquires the target, maybe not for 50 million, but for 60 million in cash.

Now, if you process that noting that it balances at the moment, if you say the cash is gonna go down by 60 and there's nothing wrong with that, because the cash is gonna be 40 at the end of the period, then we've got a problem because this thing doesn't balance.

And thinking about our accounting equation asset equals liability plus equity.

What we know is that the target property plant equipment has been acquired for 50 million and we know that the cash has gone down by 60 million and there's nothing happened on the liability and equity side.

And so if we kind of balance the equation off, actually we figure, you know what, it doesn't balance because it looks like the assets gone down by a net of 10 and there's nothing happening on the libel, it's an equity side.

So definitely missed something outta this, and I'm sure you probably recognize this to be goodwill.

So, I'm gonna do a little working here.

I'm gonna look at the equity equity purchase price.

The equity purchase price was 60, and I'm gonna look at the value of the thing that we bought.

So the target net assets, which could be the targets shoulders equity, right? But the targets net assets are total assets of 50 minus liabilities of zero.

That's 50. Let's show the formula here.

So that means that we've got deal goodwill, deal goodwill of 60 minus 50, we've got 10, okay? And we definitely need to reflect that in our accounting equation.

Goodwill is an asset, so we're gonna have goodwill going up by 10, meaning that there's nothing happening on the liability and equity side and everything going on on the asset side nets off to zero.

Okay? So that all balances, we need to reflect that in the model here. So I'm just gonna insert a row and call it Goodwill.

And we don't have any goodwill in the target or the buyer initially, but we're gonna have an adjustment for Goodwill to, let's just copy that down.

Okay? So we're gonna go and grab the goodwill.

Now, Goodwill is a horrible number, right? So if I bought this company and I said to you, Hey, you know, I bought this company, but actually I don't want the PP&E are you interested in buying the PP&E from me? If we could agree an attractive price for both of us, then you would buy the pp e from me, right? And if I said, look, I bought this company and when I bought it, I have some goodwill on the balance sheet.

Do you wanna buy that from me? You'd say, well that doesn't make any sense, Jonathan.

Goodwill isn't really a thing, it's just an accounting adjustment.

It's like a plug number.

And so you'd say, well no, of course not.

So Goodwill's not really a very nice number, it's just a kind of plug and it is absolutely in our interest to try and suppress it if we can.

So you'd say, you'd say something like, Hey, you, you know the x you purchase price is 60, and I guess that's irrefutable.

But you'd look at the target net assets and you'd say, are you sure about that number? And the response might be, well, actually, do you know what? That's a historic number that we've had on the balance sheet when we acquired those assets and then they've been depreciating or, whatever's been going on with them.

And so it's, you know, it's kind of old, it's kind of dated, so maybe I'm not sure.

And and actually it is absolutely necessary on acquisition to do a fair value review of the assets and the liabilities in the balance sheet.

So let's keep it simple. Let's say on acquisition, the PP&E must be stepped up by $2 million, okay? So we're gonna step up the pp and e or market to market or fair value review it, whatever sort of language you want to use, but we're gonna step that up.

So, well let's think about how that might affect the numbers we've got here.

If you look at the target net assets, I'm gonna actually, insert a line and I'm gonna say PP&E step up.

So I'm gonna say equals and chuck it a two in there.

And then I think we need another line actually.

Now I've, I've written target net assets, but I'm gonna press F2 on that and I'm gonna say at book value, okay, I'm gonna create another heading.

I'm gonna say target net assets at fair value.

Okay? Now the target net assets at fair value, I reckon are actually 52.

So it'd be reasonable to say we've paid 60 for something that given an updating to its price, to its value, we think has a value of 52.

So the goodwill actually 60 minus 52 is eight.

Now, you'll notice soon as I do that calculation in my model, this is like flown, flowing through to my good will calc.

And now unfortunately this isn't balance, but that's because if you look at the PP&E here, we've got 500 and we've got 50, so we've got 550, but I thought the PP&E was worth 52 that we were acquiring.

So we need an extra adjustment here.

And a insert another column, I'm gonna say a DJ step up and I'm gonna go and grab the PP&E that step up of two.

And now of course everything balances as it should.

Now how does this relate? If you go back to the, if you think back to the divestitures workout, we were just looking at, we were talking about the difference between the tax base and the accounting base.

So, what I think has happened probably is at some point the group has acquired this sub and on acquisition in order to kind of get a good handle on how much goodwill that should be generated from their, the acquisition.

I suspect they've done a fair value. Well, they will have done a fair value review and I suspect that they, they've probably ended up stepping up some assets.

So they've got, when they acquired the company, they kind of stepped up the assets to a number that we don't know.

And then subsequently the business has been generating profits and retained earnings has been growing on top of that.

And we've got to 110.

So we look at 110 and we say, right, tax authority, we, let's think about how much tax we owe you, where we sold it for 250, it's worth 110.

That's the book value. So we've got a gain of 140.

The tax authority is gonna say, excuse me, where'd you get the 110 from? And I would say, well, when we bought the company, we stepped up the assets and then it subsequent, subsequently made some profits, it's grown to 110.

Now, the tax authorities will say, well, we don't recognize the step up, right? Because if, if you could step an asset up and the stepping up of the asset would reduce the amount of tax that you are gonna pay, like capital gains tax, then you could just make up any number you want in order to pay no capitals gains tax.

So we won't accept that.

In fact, the tax authorities would say, look, you had a certain tax basis when you acquired the company.

We ignored the step up. We accept that maybe it's generated some profits. The retained earnings has grown a bit.

So we, we can accept that where we are at is that we think that the tax basis is 40 million and actually we recognize, um, therefore a gain of 210 and tax of 42.

Now let's process some of the adjustments. Then, if you look at the, if you look at what we're doing, if you look at the question it says, we're disposing of one of the subsidiaries.

So I'm gonna create, a few adjustments here. I'm just gonna sort of control r out these headings and just knock them out, create some new headings ourselves.

I'm gonna say a DJ adjustment, decon, deconsolidation.

Nothing weird there, okay? We, we did that in the last workout.

We're gonna do an adjustment a DJ for the cash that we're gonna receive. We're gonna do an adjustment for the gain and we've got two gains to select from here. We've got an accounting gain and a taxable gain. So we need to think about that.

I think maybe one more is we need to think about the tax and then we're gonna have the group excluding the sub, a group excluding the sub.

Okay? So let's go and process this.

We're gonna de consolidate the subsidiaries assets.

Of course we are. And we're gonna consolidate the asset, the subs liabilities.

And I'm careful not to consolidate the, the equity because we'd never have consolidated that in the first place as we've discussed.

Now we've received some cash, so I'm gonna increase the cash.

And it doesn't matter if you're looking at the accounting gain or the taxable gain, we've received 250, that's irrefutable.

So we're gonna go and grab that.

Now there's kind of like a difference between the net assets that we are de recognizing and the cash that we've received and the difference between the value of those assets and the cash is our gain.

Okay? So, we're gonna recognize that gain in equity and I'm choosing the accounting gain. And the reason I'm doing that is because we've deconsolidated 110 million.

Okay? So we've deconsolidated 110 million of net assets and we've recognized a receipt of 250 million, okay? We haven't deconsolidated 40 million. That's just a tax basis.

So if you're gonna say, well, what gain do we need to plug the gap here? The gain is definitely the accounting gain. And I can prove that because if we completely ignore the tax, let's go into the group column, say, oh equals go and grab the group and go and grab all of these adjustments.

I'm gonna copy these down.

I'm gonna, whoa, I'm gonna copy these down.

And for the total assets, I'm gonna just copy across the totals.

Don't usually like the totals in the middle because they're a bit messy and, liability and equity.

Let's copy that across.

It's probably a nice idea if I show you the, formulas so you can see what's going on.

And I'll just zoom out slightly so you can see just what's happening there.

Okay? So the important thing is that it doesn't really matter what the tax basis is at the moment.

It doesn't really matter what the, what the, you know, the taxable gain is and what the tax on the gain is. That's not relevant.

It balances irrespective of what we're doing with the tax because we are picking up what you've paid against the underlying value of the thing that you are de consolidating.

And the difference between the two is the gain. Okay? So that's that, that's fine, but we do need to think about the tax.

Now what I noticed that that differs from the last example.

It says tax is paid in the year it occurs.

And so I think what we're gonna do is we're gonna go to the cash and we're gonna reduce the cash by 42.

And we're going to, I'm gonna multiply that by minus one because we definitely wanna reduce it and I'm gonna go to the equity and we're gonna reduce the equity By um, fort two also to make it balanced.

Okay? So we introduced a few extra ideas there, but both of these examples are the absolute ideal whereby we have a trade sale probably at a premium and we just cut and run and we get rid of the business.

But what if you can't do that? Let's look at workout.

I'm not gonna do workout three, I'm gonna do workout four.

So let's out four is just slightly more kind of straightforward. It's a good, it's a good starting point.

So let's skip down to workout four.

And there's a, a very small amount of discussion required around this. Maybe we'll jump into the scratch pad and have a look at a few ideas.

It says, out four is s group is planning to IPOA subsidiary, IPO, initial public offering.

So they still wanna get rid of it, but maybe they can't find a, a strategic buyer, they can't do a trade sale, which is kind of disappointing.

And there are a bunch of reasons for that.

So for example, if you talked about fiat, you know, Fiat wanted to offer load Ferrari a few years ago and how do you value Ferrari? It's kind of a unique asset, right? So what are you gonna do? Hey, here's an idea.

Why don't we, IPO some of Ferrari and then, you know, through the equilibrium of supply and demand for its shares, we'll figure out what the market thinks it's worth.

And then that puts us in a position whereby we could sell into the market the remaining shares or we own maybe if we own 70%, a buyer would come in and buy the 70% from us, and that would be a really nice position to be in.

Because they might well pay a premium, then they'd control the company.

Then they might you go and buy the rest of the shares from the market.

So we do an IPO, which is, I think it's not, you know, it's not ideal, but it's a legitimate divestiture strategy.

So they're gonna IPO a non-controlling stake.

So why would that be the case? Like if you're gonna IPO it just dump a hundred percent of it.

I mean that's difficult, okay? So if you're gonna do an initial public offering to, to be selling all of the business, it's, you know, it doesn't send a very confident message to potential investors, that we're that the underwriters are trying to get to subscribe to the IPO.

And so we we're selling here 30%, okay? What does that mean? Well, if we're selling only 30%, we are not de consolidating it because we still own 70%.

So it's still fully consolidated.

Now we'll need to have a quick think about how that might work.

So if I go to my scratch pad, I'll make a very, very small amendment here.

Should be pretty straightforward.

Let's just maybe get rid of the inking, in the workbook.

Okay? So I'm gonna say buyer acquires 80% of the target of, or 80% of target, 60 million in cash.

Now if I just kind of sit there and scratch my head and think, well what difference would that make if they'd only bought 80%? Because if they buy 80%, they're still gonna control the business, which still means they fully consolidate all the assets and liabilities.

It means that, you know, they're still gonna fully consolidate the PP&E for example.

So I'm just wondering what difference that might make.

Well the answer to that is if we go down to the goodwill calculation, we've got the equity purchase price, which is, is what it is, okay? No change there. We've got the target net assets at book value.

I'm gonna just edit that and I'm gonna put a hundred percent in there and then we've revised that number at fair value.

I'm gonna also write a hundred percent, but we're not buying a hundred percent.

I just don't actually think it's reasonable for us to say we've paid 60 and we've bought something worth 52 because we have paid 60, but we haven't bought something worth 52 because we've only bought 80% of it.

So I'm gonna go and grab the target net assets, not at a hundred percent but at 80%.

I'm gonna do a little calculation there. Let's show the formula.

I'm gonna grab the 52 and I'm gonna multiply it by 80% and then my goodwill calculation is gonna be 60 take away not 52, but take away the 41.6 which is the 80% and that means that my goodwill is 18.4 and you can actually see that this is automatically updated into my model.

And the slightly concerning thing is that it's now not balancing whereas it was previously.

And so I think well hey Jonathan, what are you missing here? Well I think what I'm missing is that I fully consolidated all the assets and liabilities, but I'm not financing all of those.

We've got some of the subsidiaries assets and liabilities that are financed by another party, in fact a non-controlling interest.

I'm gonna insert new row and I'm gonna call that NCI and the buyer and the target have no NCI at the start. Let's just kind of reinstate the totals and I'm gonna insert new column and the column, I'm gonna call it a DJ adjustment for the non-controlling interest.

And I guess let's color this in yellow, I guess in this box here in yellow.

I wanna figure out what the, my under adjustment for the NCI and figure out what the NCI would be in the balance sheet.

I hope it's 10.4, that would be pretty good, wouldn't it? So let's calculate that.

We're gonna say NCI now the, we've bought 80% of the fair value of the net assets.

The NCI must be 20% of the fair value of the net assets of the target.

And so if I say hang on a minute equals the net assets of the target at a hundred percent at 52, if the NCI has 20%, they're gonna multiply that by 20%, then that's 10.40 brilliant.

10.4, that's absolutely the number I was looking for.

'cause that's going to make this balance.

Okay? There's my 10.4 and that's perfect.

That makes it balance. So I guess what I want you to hold in your head is that when we acquire a company but we don't acquire all of that company, then that will give rise to a non controlling interest.

And if we go back to the workout it's an acquisition has already happened. Yeah, so what's happened is the group has acquired a sub at some point in the past, okay? And I presume, you know, it's acquired all of it.

So there is no NCI but now subsequently it's gonna IPOA non-controlling stake.

So it's gonna, it's gonna sell 30%.

Now that should put it in the same position as if it had originally bought 70%.

Yeah, if it had bought a hundred percent wait, it bought a hundred percent no NCI.

If it bought 70% they'd be an NCI.

If you bought a hundred percent and then subsequently sold 30%, there should be that same NCI there.

And that's really what we need to figure out.

Now I think we're gonna need a few headings here.

I'm just gonna delete the headings that we've got and just, I'm just gonna insert a few rows.

So let's insert a few rows and I think maybe we need to think about the sale proceeds.

I'm gonna call it sale proceeds.

So I see we don't have a heading that's uses that terminology and I think we'd use that in previous workouts.

Just wanna be consistent.

And I also want to know what the shareholders equity is and or net assets.

Because it's the same number gonna say equals and I think it's 110, isn't it? Nothing too weird there. And you know what I wanna do next? I wanna calculate the gain on the sale.

Gain on sale gain on the sale sorry, sub shareholders equity 110 obviously.

What I should have done is best F2 and multiplied it by 30% because we've sold the 30%.

So the game on the sale is 70 minus, the 33 is 37.

So we've got sales proceeds of 70, we've got a gain on the sale of 37.

And I'm just gonna hold that there for a minute.

Let's do a few adjustments.

Now I'm gonna just knock out the headings there and create some new headings.

I'm gonna control r these headings out to column H.

And in the very, very far right I'm gonna say group post, IPO, it's group post IPO.

And I think we need some adjustments.

So I'm gonna say ADJ and you might say Yes Jonathan, maybe we need to de consolidate.

Do you know what we don't in this example because they're still gonna own 70%, so it's still fully consolidated.

What we need to think about is the cash that they're gonna receive.

So we need to go and pick that up.

I'm gonna go to the cash, I'm gonna say cause they're gonna pick up the 70 million.

We also need to think about the gain A DJ gain.

Okay? And I'm gonna go down to equity because we're gonna recognize the gain on the sale in retained earnings.

So gonna be in equity, I'm gonna say equals gonna go and grab the gain of 37.

Now if I just kind of leave it like that and say, Hey, what is the group after the IPO or equals gonna go and grab the group.

There's no deconsolidation. So the group for the most part is just good.

Like we are 90% of the way there.

But I'm gonna pick up the adjustment from the sale proceeds, the cash and any gain.

I'm just gonna show you my formula and we'll copy this down And I'm gonna just put in the, put the headings in bold so they're nice and easy to read and control R those out.

Let's just gonna get the reinstate the headings appropriately.

Okay, now I've got a problem here.

Actually I was gonna say a massive problem.

I'm not sure if it's a massive problem, but I've got a problem and that is that the balance sheet after the IP doesn't balance, it's out by 33.

And clearly I anticipating there might be another adjustment you think, well what have you missed? What I've missed is the non-controlling interest NCI.

And you think, well how do I calculate that? Well, I think I know what it's gonna be. It's gonna be 33.

If you wanted to calculate the NCI, which is at 30% of the fair value of the target net assets or the target shareholders equity if you prefer, we don't need all of these. Rose gonna put that in bold.

They'd, I guess you'd say, well the shoulders equity's 110 and the NCI is gonna own 30%.

So it's gonna be 33.

So if we look at the adjustment column for the NCI and if you look at the non-controlling interest row, I'm gonna say you because and pick that up and then that works.

Okay? Now we've got 10 minutes left and I think we've just got time.

If we're quick to squeeze in something interesting on US GAAP versus IFRS in the way that this is accounted for.

So we've accounted for the non-controlling interest, using the fair value of the shareholder's equity, which is an IFRS type approach under IFRS.

You also have the opportunity to value it using the fair market value.

And this approach is mandatory under US GAAP. Okay? So we're gonna now look at that.

If I go back to work out three, this is what workout three is all about.

So it says Brittany Crepe Group is playing to IPO subsidiary.

The IPO is for a non-controlling stake.

Non-con controlling interest will be counted for at fair market value.

That is crucial, okay? At fair market value adjuster balance sheet.

Now I'm gonna go back to my scratch pad and I think we just have just about enough time, we've got nine minutes to um, do a job of explaining this.

So if you said down the bottom where we've got NCI, if you said, oh no, look, the NCI, the NCI isn't gonna be 30% of the fair value of the shareholder's equity, it's gonna be at the fair market value.

Now I'm entirely making this up, but let's say the market value, you know, the value that we could sell that for, okay, separately if we were IPOing it for example, isn't 10.4, let's say it's 12.4 'cause that's just a nice easy number to deal with.

Now if I change that to 12.4, because I've recognized it at the fair market value, that's gonna flow into my NCI in the balance sheet.

And the impact is that it doesn't balance.

And I think, well how can I now think about this to make this balance it's goodwill? Okay? So if you think, well what is goodwill? Goodwill is the price of something against the underlying value, okay? On the balance sheet. So it's the equity purchase price against the underlying value.

We can apply that same principle to the NCI.

So let me just get rid of my annotation here.

We've got the fair market value, like the price of the NCI, what would be the book value? Well if I said let's grab the target net assets at fair value at 20%, okay, which is of course the value that we previously recognized the NCI at, I would go and grab the target net assets of 52 at fair value at a hundred percent and I'd multiply it by 20%.

Okay, can I grab that number and multiply it by 20%, which is 10.4.

Now if you think previously ly, we'd recognize the NCI 10.4 if the underlying book value is also 10.4, the goodwill is zero.

If you wanna recognize the NCI fair market value of 12.4, comparing it to the, the book value, fair value of 10.4, we've got a goodwill, Goodwill on NCI stake of two, okay? Not a particularly weird number.

And that means that when we calculate our goodwill, we should really pick up the goodwill on the stake that we bought and the kind of implied goodwill that might have existed on the stake that we didn't.

And if we do that, it balances.

So the kind of critical thing I want you to take away from this is that if you want to recognize the NCI at its fair market value, then you will need to calculate some extra good will on that. It will give rise to some extra goodwill and let's put that into practice in the our divestitures.

The last thing we'll do, and we'll, we'll get it, we'll, we'll definitely get this squeezed in.

So, um, it says Brittany crepe, um, is playing to IPO subsidiary, it's IPOing, a non-controlling stake. And below it confirms that's 30%, but non-controlling interest will be accounted for at fair market value.

Adjust the balance sheet for the divestiture, assume it's tax free, okay, I'm gonna create some extra line items down here and we'll just do some extra working to make it super clear what's going on.

So we're gonna have the sale proceeds.

Now I would say that the sales proceeds are given to us as 70.

Ah, that's a bit annoying. That's a percentage, that's not a problem.

I'm gonna say alt H for home, J for cell styles.

And I'm just gonna use my arrow keys or my mouse just to let the normal sell style, just gonna copy that cell style down just so we don't carry anything forward.

Okay, so I've got sales proceeds of 70, um, I'm interested in the, um, sub shareholders equity at 30%, which is 110 multiplied by 30%.

So it's 33, not weird, have you seen that number before? And I am also I'm also interested in the the game on that sale.

Again on that sale, of course we are, so we're gonna pick 70 minus 33 now it just gets slightly more interesting. Now we've got the sales proceeds, which you want. We've got the gain on the sale, okay, which we need.

I'm gonna just insert a few extra rows here because now we're looking at the NCI at, I'm gonna call it fair market value.

So you've gotta sort of scratch your head and say, well, so what is it worth then? Like the book value was, I dunno, 33, but what would be the market value or what have you sold it for? I mean, you've just sold it, right? If you iPod it.

So that must be the market value, which is 70.

Okay? So, we wanna maybe recognize some goodwill on that.

So what's the underlying book value of that? Well, I think we've got that already.

The sub shareholders equity at 30% was 33.

And so the goodwill on the NCI stake is 70 minus 33, it's 37.

So we've got about three minutes left and just I think enough time to flesh out these adjustments. It's gonna create a few more columns here.

So let's grab a few more columns.

We're gonna do an adjustment for the cache.

We're gonna do an adjustment for the gain and we're gonna do an adjustment for the NCI.

We're also gonna do an adjustment for the goodwill on the NCI stake and then we're gonna have the group post IPO.

Okay. I think that and this is not different from the stuff that we've done previously.

I think that the cash is gonna be 70 that we're receiving the accounting gain that we recognized was going to be 37.

And the NCI, which I've now got a row here for NCI and I've got my NCI column, um, is a fair market value of 70 and the goodwill with calculators being 37.

So if we look at the group post IPO, let's just copy this down.

What we are hoping is that if we pop in the subtitles, let's copy this. Whoops. Let's correctly copy this out to the right, did the same here.

And crucially, if you look at the balance check, that now balances.

Okay. So, how are we doing? Well we're we've come to 259 UK time and I think that's, uh, probably bringing the session to a close.

So we've looked at the we looked at trade sales divesting in that way and we've looked at IPOs and we've looked at some US GAAP stuff and we've looked at some IFRS stuff.

So I hope the session has been useful.

I appreciate that you are probably busy and you've got other things to be doing.

So I want to say a massive thanks for taking time out of your day to dial into the session.

I will just remind you that if you jump onto the link you can download the full version of the file and I think when you close down zoom, you will get a little survey to complete. So I very much appreciate it if you could take the time to do that.

Thanks so much for being online with me and hopefully see you soon in the future.

Take care. Bye now. Thank you. Bye.