When to be stubborn can cost hips, page-37

Hi mike, I'm aware of Burns Philp but not familiar with the Graham Hart story. It does sound like a good example of a turnaround though, thanks.

I'm wondering if I have a different interpretation of what SGS goodwill represents to others. I'm sure we all agree that goodwill is the excess paid over fair value of assets purchased - that is a given.

I agree that from a cash perspective it doesn't matter if they impaired $500m goodwill this year, cash is cash. The problem is what that remaining $500m goodwill would represent.

I'm simply taking it from Slater's FY15 annual report how they value goodwill at NPV for the CGU with different discount rates depending on their profile. From memory the NPV of goodwill is $125m greater than that reported on the balance sheet at FY15. The balance sheet SGS goodwill is clearly just the balancing figure to square out the purchasing cost of PSD considering other SGS assets reported at fair value. It is provisional accounting so the actual amount of goodwill adjusted may be less or more depending on final assessment of fair value WIP at time of purchase.

Why I say goodwill is so critical at this time is it is simply the company's forecast of NPV of cashflows for the SGS business. Or in other words what they believe SGS is capable of producing. So whereas an impairment is none cash item this year it does indicate the future value they see in SGS and whether or not that is sufficient to service debt + plus provide a return for shareholders. If it is not sufficient then the SGS business would need to be subsidised by an increasing return from the other CGUs.

A related point to all this is I cannot accept how people can say they paid too much for PSD at this time. The bulk of value is in its network and future cash flows that network will generate. It is too early to say that will not be realised - though impaired goodwill would be a strong clue. Even if SGS just broke even FY16 it doesn't prove it paid too much. If it didn't improve by FY18 then it definitely paid too much (it wouldn't actually be around in its current form if no performance improvement was evident).

Goodwill = nothing to do with Quindell per se.
Goodwill = as it will be reported in 1hFY16 is future cash flow value from SGS discounted to today and modelling verified by E&Y, PWC and McGrathNicol (presumably the last one).

Whether or not Quindell could demonstrate value in PSD is irrelevant, the calculation is what Slater see as the future value. One might say well if Quindell couldn't demonstrate any value then why did we pay. Nobody will know the answer to that unless involved in negotiations. Perhaps Slater cut it to the bone and it got to a take it or leave it from Quindell - who knows?


As time goes by the value of goodwill stated at purchase becomes less important and the emphasis switches to how much it actually does generate in the forthcoming years. Goodwill is never increased so if it continues to present value greater than on the books goodwill will remain on the books as is. That extra value will be represented elsewhere on the balance sheet to increase net assets - or returned (partial/full) to shareholders in dividends.