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Baa Bar Group plc - McArthur and HMRC [2020] (part two)

Author: Andrew Strickland

Published: 22 Nov 2023

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The Story So Far…

This is a gift aid case: Baa Bar Group plc had acquired an eponymous company which owned student bars in Liverpool and Manchester. The gifting of shares in Baa Bar Group plc three months after listing onto the CISX was the tax event that dragged this case to the doors of the Tax Tribunal, albeit as the culmination of a legal process taking 17 years.

The case is packed with technical content. The valuation included a minority discount, comprised of the DLOC and the DLOM. The DLOC was calculated by an inversion of a control premium of 26%. We now need to consider the calculation of the DLOM.

Protective Put Option Theory

There are various mathematical models used as a means for calculating the discount for lack of marketability or DLOM. The underlying concept is a simple one: we must imagine two types of shares in a public company; they are identical in every way except that one type cannot be traded on the markets and is wholly illiquid. That illiquid security, if bundled with a put option requiring a third party to buy the shares, is equal to the value of the liquid security.

If this logic is pursued, the discount for lack of marketability, sourced from the public markets, equates to the cost of the put option expressed by reference to the price of the liquid share.

The written decision refers to the protective put option. This is the term used to describe the first of these models, that devised by David Chaffe. It is based on the most solid of intellectual foundations, namely the Black Scholes Option Pricing Model. It is described as the protective put option as the buyer of such a put option has protected the value that applied at the start of the period of illiquidity.

The Calculations

We will join the calculations where the valuer had determined the control value of a private company as being 100. He deducted 20.6% (26/126), being the discount for lack of control or DLOC. This gave a value before the DLOM of 79.4. He applied a DLOM of 11.1% to the amount of 79.4. This resulted in a discount of 8.8, resulting in a non-marketable minority value of 70.6. The combined DLOC and DLOM discount was therefore 29.4%. This was rounded to 29.5%. In accordance with accepted best practice in this area, he had considered the DLOC and DLOM as being subject to multiplication rather than addition.

As mentioned in part one, this case related to events as long ago as 2003. Using a risk-free rate estimated at 5.25% at that time and a period to a liquidity event of five years, as stated in the written decision, the volatility input can be back-solved as being 26.7%.

The Application

The valuer applied the combined DLOC and DLOM discount of 29.5% to his cost approach valuation of 11p, as we saw in part one. He derived a value of 8p per share.

The valuer then considered the market approach and the comparable company method. The various listed companies chosen are not stated: only Greene King is given a mention in the written decision. The markets provided an EBITDA multiple of 11.6x.

The maintainable EBITDA of Baa Bar Limited was calculated. The above multiple was applied. There was then the combined DLOC and DLOM deduction of 29.5%.

Ipse Dixit?

This was a term used by Counsel for the taxpayers in an attempt to discredit the use of the protective put option model to calculate the DLOM. The literal meaning is “he himself said it”. In the courts it is used to describe a dogmatic assertion without supporting evidence.

We can recognise that the Counsel for the taxpayers was in some difficulty in trying to make a case that could be defended. He may have seen the challenges of explaining put options to a lay audience as showing a chink in the armour of the expert valuer instructed by HMRC.

It is clear that this was not the view of the Tribunal Chair. He was happy to apply the calculations of the HMRC expert, albeit using a modified figure for the maintainable EBITDA of Baa Bar Limited.

A Major Problem

The valuation under the market approach resulted in a value of 55p. This contrasted sharply with the 8p that had been calculated under the cost approach. The HMRC valuer considered that the evidence supporting the 8p valuation was of far greater quality and relevance than that drawn from the markets.

The Tribunal Chair was faced with a challenging problem. He felt that he had no option other than to apply the wisdom of Solomon. The value was determined to be the average of these two very different valuations. The shares had a value of 31.5p.


It is my view that the evidence from the transaction in the open market that had taken place three months previously was compelling: there was no updated trading information and no other evidence to suggest that the pricing in the markets had dramatically altered.

We therefore have the unusual ability to assess the various calculations against a yardstick of compelling authority.

The evidence from the markets can be calibrated with that of the cost approach. The transaction in which Baa Bar Limited had been acquired resulted in an EBITDA multiple of just under 7x. This is consistent with a discount from the large brewery chains on the markets of 40%. Companies such as Greene King are very far removed from a company operating 7 student bars in Liverpool and Manchester. If the control premium and the private company discount, together with the DLOC and the DLOM calculations, had delivered a composite discount close to 40%, the values under the cost approach and the market approach would have been very similar.

*The views expressed are the author's and not ICAEW's.