"US should make bidders believe that a profitable deal is just on the edge of their reach, and if they 'stretch' a little, they've got it!" Vinod Giri, Head (Sales & Marketing), SAB India

Any kind of auction is really a process to get the highest price for a product. To achieve that, one has to attract many suitors, and to attract suitors one has to look both desirable as well as gettable. Putting a high floor price that is not in line with real brand value is more likely to dissuade bidders, since most bidders actually assume that the real price will anyway be above the floor price.

On the other hand, it is true that though a low floor price may attract many bidders, all bids could also fall short of US' expectation. Hence, it is important to set the floor price in such a way that while still looking commercially good to attract many bidders, it remains close to the actual worth of the brand.

The worth of the brand is essentially the sum total of assured brand earnings in perpetuity. This is determined by the discounted cash flow (DCF) over the next 10 years and thereafter on terminal value. This is the real value of the brand and should be the floor price.

The arguments of Jain and Singhal for a higher floor price on account of other intangible assets are not really valid, because these intangibles are already reflected in the DCF measure. Also, let's not forget that the future works both ways. While most DCF calculations assume these intangibles in future, not many factor possible erosion in these. There is no zero-risk environment, and ideally the discounted cash flow should be adjusted for risk factors on the basis of the brand strength as determined by measures such as current market share, stability, nature of industry, geographic spread, support, trademark protection etcetera.

In most valuation methods, the lowest discount rate is 3-3.5 per cent, which is applicable to near-zero risk investments such as Government bonds. Given the uncertainties related to the alcohol industry in India, if you put Philly against the brand strength parameters mentioned above, it's not difficult to see that there could well be a risk discount on the expected cash flow, in addition to the regular present-value-determining discount, which I would estimate as high as 10-12 per cent.

Hence, if the discounted cash flow, after adjusting for charge on capital employed, taxes and inflation, indicates a price of Rs 100 crore, go ahead and offer that as the floor price. This is consistent with the current value of the brand. Any price above this is really a premium paid by the buyer for strategic reasons, and is a windfall to US.

There is indeed a risk that a failed auction will erode the brand's perceived value. Remember that the key to good auctioneering lies in making bidders believe that a profitable deal is just on the edge of their reach, and if they 'stretch' a little, they've got it! Take it too far, you lose both bidder and the bid.

"US should have a well-defined fallback plan on how it will maintainand sustain the brand equity of Philly, if it is not able to sell it at the desired minimum floor valuation." Srikant Illuri, Managing Director, Allied Domecq, India

Universal spirits is at a strategic fork, in choosing its future course in an evolving market. Headquarters may have embarked on a corporate vision to drive growth only through global brands, but in India, the group appears to be in an enviable position, with the choice of combining a successful local business with an international portfolio in a market that is not just evolving, but doing so dynamically.

Would selling a large-volume brand in India, where restrictions on brand building in the spirits market tend to only increase, be a wise move? In addressing this question, US India may see Philly as a one-off opportunity that should not be let go so easily, but it will still have to weight the option of keeping the brand against the strategic course the company wants to embark on from here. What are US' broad strategic goals for the market? Can Philly contribute?

The alternative, as outlined, is to go the corporate way, with laser focus on its core global brands. This means selling Philly. As circumstances have it, there are a number of contestants with their own agenda for the brand and a bid representing the price they're willing to pay. From an ex-manager who has his signature on the brand's success, to the company that wants to get a minimum fair value if not higher, to the competition that may or may not be in the race for tactical reasons, to the investment bankers who want to ensure that they get 'fair value' for themselves.

As the owner of the brand and the business it is, I believe that it is the US group that must set a clear strategic direction the company wants to take. From there on, only these strategic compulsions should drive the valuation exercise, with a minimum condition being that a fair value be paid if the company opts to divest itself of the brand.

Trying to gain higher value for Philly by throwing in various future scenarios when it is not the strategic intent of the company to pursue Philly's growth, could not be of any benefit to US. Over time, this could probably even erode the value of the brand. If its future strategic course is to sell Philly, then US should arrive at a realistic minimum floor price for the brand, without muddling the picture with talk of what it could have done with the brand (or how far it could grow). That's irrelevant to the valuation exercise. Philly's future would be up to the buyer, which would be free to set new goals for the brand and pursue a course quite different from the ond envisaged by US.

That does not mean that US' managers stop thinking about Philly's evolution as a brand. In fact, it would be advisable for US to have a well-defined fallback plan on how it will maintain and sustain the brand equity of Philly, if it is not able to sell it immediately at the desired minimum floor valuation.

"US should just go ahead and sell Philly at a price that takes a fairly short time horizon (say five to seven years) for discounting purposes, and get rid of the brand" S. Ramachander, Director, Institute of Financial Management and Research

It must be said at the outset that there is an embarrassment in this case arising out of the former CEO himself being one of the interested parties in Philly. The people discussing the brand's value with him now were probably his juniors reporting to him just a short while ago. There is, therefore, a human dimension to this already problematic decision that we must recognise. Rajan, of course, is interested in the lowest possible price as a potential buyer, so his views are hardly to be taken into account as objective, in answer to the question posed at the end of the case. Nonetheless, given the price range talked about (Rs 100 crore is mentioned), it is doubtful that he is hoping to buy the brand with just his personal resources. Clearly, there must be some other agency or financier group or banker who would have to be rationally persuaded that at that price, the brand Philly is a good buy.

The valuation of a brand is fraught with a lot of nonsense and confusion, but is ultimately a matter of bargaining between intending buyers and the seller, no matter what the theories say. In conceptual terms, I divide the theories into three simple, broad types. The first is what I call "the past method" and could be based on some calculation of the aggregate investment already made on building the brand. This is really irrelevant because brand loyalties are relatively fickle in such a category (that is, low-end whisky); and there is no reason to believe that the brand would somehow 'reimburse' the cost of the seller's prior efforts.

The second is a 'what the traffic can bear' approach (or the current reality method), which draws a parallel with similar products sold by someone else. This is all right for regular products that you and I buy, but not for assets such as brands, for which there isn't a large volume of trade to go by as precedent. So that too, at best, could only be a guideline.

The third is the approach (the discounted future method) popular with finance professionals, and takes a discounted cash flow or some modified form of an asset-pricing model. If you pay Rs 100 crore for Philly, how much can you expect to earn back over its reasonable economic life? Considering that its current annual sales are at Rs 150 crore, and assume that it earns say 12 per cent (or Rs 18 crore) a year, pre-tax. Does this seem a good rate of return? Only someone with knowledge of liquor industry margins could tell. My hunch is it may be okay, if one can presume that the market performance of the brand would continue to be as impressive in the face of competition.

Frankly, in this case, signalling is of little consequence, because by now most people who matter would know the brand is on the block because the foreign owner has lost interest. So I would just go ahead and sell it at a price that takes a fairly short time horizon (say five to seven years) for discounting purposes, and get rid of the brand.

"Once the money is such that you can get a greater return from it in your rationalised product line, take the money and run" would be my advice. Auctioning is hardly the right mode for such a sale. It has to be based on closed bids and detailed negotiations thereafter.