Brand Valuation

Case Studies September 2010

In this brand (!) new world, What IS a Brand and What DOES a Brand do?

18-Sep-10

Contents
What is a Brand Why Brand Valuation General Valuation Methods Specific Valuation Methods of various players Case of the Melting Moments Case of the Pain Killer Case of the Value in paper An aside at Accounting for Intangibles

What is a Brand

What is a Brand?
A brand is name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competition. American Marketing Association (AMA)
Source: Competing for choice: developing winning brand strategies by Lars Finskud

What is a Brand?
A brand is a complex symbol, it is the intangible sum of a products attributes, its name, packaging, and price, its history, reputation, and the way it is advertised. A brand is also defined by consumers impression of the people who use it, as well as their own experience. Advertising guru David Ogilvy, 1955
Source: Competing for choice: developing winning brand strategies by Lars Finskud

What is a Global Brand?

Global brand is basically the same product or service everywhere, with only minor variation (as CocaCola and Guinness) Global brand has the same brand essence, identity and values (as McDonalds and Sony do) Global brand uses the same strategic principles and positioning (as Gillette does) Global brand employs the same marketing mix as far as possible
Source: Branding by Geoffrey Randall

Brand Value/Power Bases

Growth rates Market share History Price premiums Brand awareness Brands ability to earn

Indias 100 Most Valuable Brands

Image & perception Brand awareness Brand loyalty Brand association Brand preferences

Brand Iceberg
Brand experience externally Brand experience internally
Name Advertising Logo Brand Equities Environment Products and Services Brand Values Management - control structures Internal Communications Business Process Investor Relations Customer Relations Training Quality Staff Motivation Knowledge Management Recruitment Policies HR Policies & Processes Technology

Source: http://www.brandchannel.com/images/papers/bankonthebrand.pdf

Why Brand?
Important wealth creator Enhances return from commoditized offerings Investment in brands beginning to show valuable return Helps address customer churn Examples:
Malaysian Airlines strong brand experience has helped the business to avoid near bankruptcy and for it to stage a turnaround of the business Nirmas blitzkrieg when it entered the market in a big way
18-Sep-10 11

Top Ten Valuable Brands ($ Bn)

1. Google - $100.0 2. Microsoft - $76.3 3. Coca-Cola - $67.6 4. IBM - $66.6 5. McDonald's - $66.5 6. Apple - $63.1 7. China Mobile - $61.3 8. General Electric - $59.8 9. Vodafone - $53.7 10.Marlboro - $49.5
18-Sep-10 Source: www.indusrtyweek.com 12

Whats been the history?

Product
Bacon Batteries Biscuits Breakfast cereal Canned fruit Chewing gum Chocolates Flour Mint candies Paint Pipe tobacco Razors Sewing machines Shirts Shortening Soap Soft drinks Soup Tea Tires Toothpaste

Leading Brand 1925

Swift Eveready Nabisco Kellogg Del Monte Wrigley Hershey Gold Medal Life Savers Sherwin-Williams Prince Albert Gillette Singer Manhattan Crisco Ivory Coca-Cola Campbell Lipton Goodyear Colgate

Position in 1985
Leader Leader Leader Leader Leader Leader No. 2 Leader Leader Leader Leader Leader Leader No. 5 Leader Leader Leader Leader Leader Leader No. 2

18-Sep-10

13

Why Brand Valuation

Importance of Brand Asset Value

18-Sep-10

Source : K.L.Keller

15

Industry vs. Brand Value Significance

Industry
Apparel Tobacco Food products Chemicals Electric machinery Transportation equip. Primary metals Stone, glass, and clay
18-Sep-10

Brand Equity
61 46 37 34 22 20 1 0
16

Why Brand Valuation?

Acquisitions, mergers and sales of businesses or parts of businesses Purchases and sales of intangible assets Reporting to tax authorities Litigation and insolvency proceedings Financial reporting

18-Sep-10

17

Why Brand Valuation?

Fund raising against brand is also possible!

18-Sep-10 18

Global Parallels!
Calvin Kleins $58-million securitisation in 1993, which was linked to future sales of its perfume products. DreamWorks used $1-billion raised from the securitisation of copyright in a film portfolio to refinance outstanding credit facilities in 2002. Fashion brand Guess raised $75-million in 2003 from securitisation of its trademark licences. Athletes Foot, a sports footwear retailer, raised around $40-million securitising its franchise resources. Burn Stewart Distillers raised 31-million from Belgium-based bank against its whisky brands in 2008.

18-Sep-10

Source: Linklaters, London; Intangible Business Limited, London

19

Why Brand Valuation?

Revenue stream from various businesses

18-Sep-10 20

Why Brand Valuations?

IPL brand value doubles to $4.13 billion: Study
PTI, Mar 22, 2010, 09.26pm IST
"The IPL brand alone has risen significantly from the previous year's valuation providing tremendous economic value to its owner BCCI," according to brand valuation consultancy. "In comparison to international benchmarks for sporting business' such as EPL (English Premier League) which is valued at $12 billion, the IPL juggernaut, in a short span of 3 years, is valued at $4 billion and has the potential to grow further," said, Managing Director of a Brand Consultancy.

18-Sep-10

21

Why Brand Valuation?

Acquisitions, mergers and sales of businesses or parts of businesses Purchases and sales of intangible assets Reporting to tax authorities Litigation and insolvency proceedings Financial reporting

18-Sep-10

22

Why Brand Valuation

Lets look at purchase of a vehicle

When you go to buy a scooter
Price is discussed for the scooter as a whole!

When you go to buy a regular car

Pricing varies for whether it is a Petrol or Diesel Model Pricing also varies for whether it is metallic colour or not Pricing also varies for whether it is deluxe model or not Thus, price is discussed for some additional components also!

When you go to buy a custom designed luxury car!

Even upholstery choice has a differential cost Dash board designs could have differential costs!

Essentially, component costs are looked at as the size of the deal increases!
18-Sep-10 24

When Brand value makes sense

When you buy a corner shop, you still may be paying for the goodwill it has in the neighbourhood
But, this is not valued separately one lumpsum is what is negotiated

When you buy smaller companies

You may pay a higher price than book value This is in totality considered as goodwill

However, when the deal is really large

Intangibles are separately identified! In very large deals, it makes sense to look at brand value

18-Sep-10

25

General Valuation Methods

IVSC - Valuation of Intangibles

International Valuation Standards Councils Guidance Note One of the three fundamental valuation approaches
The comparison approach The Income approach The cost approach

An additional approach of real options valuation approach

18-Sep-10

27

IVSC - Valuation of Intangibles

The comparison approach
Transaction prices based valuation multiple Bids or Offers involving similar or identical assets

Practically, this method is difficult to use for Intangibles due to

Lack of comparable transactions Lack of similarity between any two intangible assets

18-Sep-10

28

IVSC - Valuation of Intangibles

The Income approach
Relief from Royalty Method Premium Profits Method Excess Earnings Method

Each of these methods could involve

Discounted cash flow computations or Application of valuation multiple in simple cases

Tax Amortisation Benefit can also be considered, where applicable

18-Sep-10 29

IVSC - Valuation of Intangibles

The Cost approach
Depreciated replacement cost approach

Done by identifying
Reproducing an identical asset in the market Developing, replacing or building similar asset

This method is also of limited use in general

18-Sep-10

30

Methods of valuation
Market value of shares less book value / adjusted book value of shares Market value of shares less book value less managements expertise (intellectual capital) Brand replacement value
Present value of historic investment in marketing and promotions Estimation of the advertising investment required to achieve the present level of brand recognition

18-Sep-10

31

Methods of valuation
Difference between the value of branded companies and similar unbranded (generic) companies
Present value of price premium paid by the customer over generic products Present value of extra volume over generic product that sells due to brand The sum of the above two values The sum of the above two values less all brand specific expenses and investments

18-Sep-10

32

Methods of valuation
Difference between (price / sales) ratios of branded and unbranded company multiplied by the companys sales Differential earnings multiplied by a multiple
Multiple reflects the brand value drivers

PV of FCF minus (assets employed multiplied by required return) Options valuation of the option of selling at a higher price, higher volume, growing through new distribution channels, geographies, products etc.,
18-Sep-10 33

Like every other valuation

It is critical to understand for whom the valuation is made
Brand owner Direct competitor Other players

It is also important to understand for what purpose

For sale For royalty negotiations For recognising asset in the books
18-Sep-10 34

Cross industry brand valuation dynamics

Helps in estimating royalty rates based on brand licensing transactions even in non-comparable industries Use such royalty rates after adjusting them for
Cross-industry brand value drivers and Considering comparative profit margins

Specific examples of how an understanding of cross-industry brand dynamics can help analysts in estimating royalty rates for use in valuation analysis of a given brand.
If the available data shows that royalty rates for brand licensing in personal care segment of the FMCG industry are 5-6 per cent of sales turnover, the rates should usually be lower in the retailing industry. If royalty rates for brand licensing in 5-star hotel category are in the 3-4 per cent range, the rates should be higher in the branded (but non-star rated) hotels category if profit margins are similar in both categories.

18-Sep-10

Once a reasonable royalty rate is estimated, the valuer can use the DCF method or the comparable multiples method to arrive at valuation of the brand.

35

An Example

18-Sep-10

36

An example of Cost approach

Year Year SG&A Expense Selling and Advertising Brand Name Advertisting Amortization this year Unamortized Expense

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

$1,682 $1,783 $1,831 $2,064 $2,314 $2,368 $2,446 $2,665 $3,038 $3,348 $4,076 $4,604 $5,249 $5,695 $6,297 $6,986 $8,020 $7,852 $8,284 $9,814 $8,551 $6,149 $7,001 $7,488 $8,146

$1,121 $1,189 $1,221 $1,376 $1,543 $1,579 $1,631 $1,777 $2,025 $2,232 $2,717 $3,069 $3,499 $3,797 $4,198 $4,657 $5,347 $5,235 $5,523 $6,543 $5,701 $4,099 $4,667 $4,992 $5,431

$561 $594 $610 $688 $771 $789 $815 $888 $1,013 $1,116 $1,359 $1,535 $1,750 $1,898 $2,099 $2,329 $2,673 $2,617 $2,761 $3,271 $2,850 $2,050 $2,334 $2,496 $2,715

$22.43 $23.77 $24.41 $27.52 $30.85 $31.57 $32.61 $35.53 $40.51 $44.64 $54.35 $61.39 $69.99 $75.93 $83.96 $93.15 $106.93 $104.69 $110.45 $130.85 $114.01 $81.99 $93.35 $99.84 $108.61 $1,703.35

$0.00 $23.77 $48.83 $82.56 $123.41 $157.87 $195.68 $248.73 $324.05 $401.76 $543.47 $675.25 $839.84 $987.13 $1,175.44 $1,397.20 $1,710.93 $1,779.79 $1,988.16 $2,486.21 $2,280.27 $1,721.72 $2,053.63 $2,296.32 $2,606.72 $26,148.75

18-Sep-10

37

Specific Valuation Methods

Equity and Sales Multiple

Market value of Equity Debt Cash Enterprise Value Sales (D + E) / S Difference Brnad Value (Difference x sales)

Branded 98,160 7,178 6,707 98,631 21,962 4.49 3.72 81,725

Generic 949 345 27 1,267 1,646 0.77

18-Sep-10

39

Other Multiples
Branded Market value of Equity Debt Cash Enterprise Value EBIDTA EV / EBDITA Difference Brand Value (Difference x EBIDTA) 98,160 7,178 6,707 98,631 7,760 12.71 5.91 45,824 Generic 949 345 27 1,267 186 6.81

Market value of Equity Debt Cash Enterprise Value Capital& Debt (book value) EV / Capital invested Difference Brand Value (Difference x Capital invested)

Branded 98,160 7,178 6,707 98,631 16,406 6.01 4.38 71,822

Generic 949 345 27 1,267 775 1.63

18-Sep-10

40

Interbrands Methodology

18-Sep-10

41

Interbrands method Step 1

Begins with determining brand differential EBIT Moves on to determining brand differential earnings
18-Sep-10 42

Interbrands method Step 2

1. Leadership. A leading brand is more stable and has more value than another brand with a lower market share, because leadership gives market influence, the power to set prices, control of distribution channels, greater resistance to competitors, etc. 2. Stability. Brands that have become consolidated over long periods of time or which enjoy a high degree of consumer loyalty obtain high scores in this factor. 3. Market. A brand in a stable, growing market with high entry barriers will score very high. 4. Internationality. Brands operating in international markets have more value than national or regional brands. However, not all brands are able to cross cultural and national barriers. 5. Trend. A brands tendency to keep up-to-date and relevant for the consumer increases its value. 6. Support. Brands that have received investment and support must be considered to be more valuable than those that have not. The quantity and quality of this support is also considered. 7. Protection. The robustness and breadth of the brands protection (legal monopoly) is a critical factor in its valuation.

Use of a multiple applied to the brand differential earnings based on above 7 factors
18-Sep-10 43

Interbrands method Example

18-Sep-10

44

Interbrands method - Example

Thus, not only differential earnings but also the qualitative parameters are given weightage in this method
18-Sep-10 45

Bert Methodology
Values brands based on following factors
Scores on each factor Values the brand as multiple of sales/ earnings based on the aggregate score

Factors considered
USP's of the brand Stability of the brand Markets - the industry in which the brand is in use Internationality of the brand The long term trends of the brands Brands receiving consistent investments Legal protection commanded by brands through registration and trademark laws Quality of support received by the brands
18-Sep-10 46

Financial Worlds Method

Similar in nature to the Interbrand valuation Steps
Work out the difference between
One brands earnings Earnings of an unbranded generic version of the same product

Use a brand strength multiple computed on 5 factors

18-Sep-10

Leadership Stability (consumer loyalty) Internationality Continued importance of the brand within the industry Security of the brands proprietorship
47

Young and Rubicams Brand Equity Growth Model

Focus on four key elements:
Differentiation: Unique attribute Relevance: Brand should serve the individual needs Esteem: The Customer should respect the brand Familiarity: The Brand should be a part of customers daily life

18-Sep-10

48

Young & Rubicams Brand Equity Growth Model .

Emerging potential

Leadership

Brand Strength

DREK
New/unfocused

DREK
Eroding Potential

DR E K

D R

EK

Brand Stature

Differenciation Relevance Esteem Knowledge

Monash University MBA - January 2002 - Prof. A. Hutinel 26

18-Sep-10

49

Young & Rubicams Brand Equity Growth Model .

Brand vitality (Differentiation + Relevance) provides the potential for brand equity growth Brand Stature (Self Esteem + Familiarity) measure the brands current strength When the Brand owners can either maintain the brands as niche brands or invest to build brands esteem to move into quadrant C.

18-Sep-10

50

Young & Rubicams Brand Equity Growth Model .

18-Sep-10

51

Houlihan Valuation Advisors Method

Present value of Companys FCF less the required return on assets employed

18-Sep-10

52

Infosys MethodCloser to home

Generic Vs. brand earnings multiple method
Determine brand profits by eliminating the nonbrand profits from the total profits of the company. Re-state the historical profits at present-day values. Provide for the remuneration of capital to be used for purposes other than promotion of the brand. Adjust for taxes Apply brand strength multiple
Function of a multitude of factors such as leadership, stability, market, internationality, trend, support and protection

18-Sep-10

53

Case of the Melting Moments

Case of the Melting moments

The target was a ice cream manufacturer
Had a great name in market Significant market share But Poor manufacturing facilities

The acquisition was essentially for the brand name!

Kwality was a leader in the game at that time (1994)

18-Sep-10

55

Case of the Melting moments

HUL had introduced Walls in India
Was not faring well at all Worried about not being able to gain market share

What Kwality made

In 1995, it controlled 50% of the organised ice cream market After about 15 years Kwality Walls has a market share of 14% in India Second in line after Amul (38%), which stromed the market

18-Sep-10

56

Case of the Pain Killer

Case of the Pain Killer

Year - 1996 Brand - Crocin Buyer - Glaxo SmithKline Beecham Seller - Duphar Interfran Limited Brand value - estimated at Rs. 42.5 Crore
18-Sep-10 58

Case of the Pain Killer

Retail sales of Crocin

18-Sep-10

1995 Rs.18.64 crores 2003 Rs.38.60 crores Consequently, Simple Annual Growth Rate 13.39% Thus, sales for 1996 Rs.21.14 crores Profitability of Crocin in year 1996 approx. 10%. Marketing expenses in year 1996 were approx. 15% Crocin was in maturity stage in product life cycle There is few little scope for any line extension
59

Following assumptions were considered:

Case of the Pain Killer

Valuation of Rs.42.5 crores then means
Payback period of over 10 years!

A valuation by independent analyst using

Sales x brand score index basis placed the value at about Rs.14 crores Which meant a payback of about 4 years Relief from Royalty method also placed the value around Rs.15 20 crores

Thus, maybe Crocin was overpriced! This was reflected by the fact, for long after acquisition, Crocin had not overtaken Calpol!
18-Sep-10 60

Case of the Pain Killer

Was it the pain killer or was it the pain and a killer! What probably drove the transaction?
Fear response to protect companys brand Calpol Aim for turning brand Crocin as an OTC product

18-Sep-10

61

Value in Paper

Value in Paper
Year - 2005 Brand Dainik Jagran Leader in Daily Newspaper Status Privately held company Plan Public issue by the business
18-Sep-10 63

Value in Paper
A public company was floated The Private company valued the Mast Head and transferred it to the public company at a value Valuation of Rs.17 crores surfaced as an intangible assets!

18-Sep-10

64

An Aside at Accounting for Intangibles

Some cases of Accounting for Brands in India

Company Year Brand Value Treatment (Rs. Crores 165 Brand Valuation Reserve 265 Revaluation Reserve 128 Revaluation Reserve Amortised over a ten yearperiod 2004 24 Amortised over the non compete period as a % of revenue from sales under this brand name Treatment of self generated brands valued Sintex Emami Kitply Nirma Wipro Chandrika brand 2000-01 2004-05 2004-05

Treatment of acquired brands

18-Sep-10

66

What is conservative?

18-Sep-10

67

What is conservative?
A US study revealed that expensing off R&D expenses is not always conservative!
If rate of growth of R&D expense is low (compared to the entitys cost of capital), then expensing provides aggressive reflection of ROE, ROA If rate of growth of R&D expense is high, then capitalisation and amortising of R&D expenses provides aggressive reflection of ROE and ROA

18-Sep-10

68

Thank you
T V Balasubramanian tvbalu@pkfindia.in

18-Sep-10

69