Module II· Special Situations ValuationIntermediate
Question
How do you apply sum-of-the-parts to a distressed company?
Answer
Mechanics
distressed SOTP differs from standard SOTP:
- Identify 'healthy' vs. 'sick' segments — going-concern value only for the healthy parts, liquidation value for the sick ones.
- Isolate cross-subsidization: a good segment often funds a bad one — this becomes obvious on a sale.
- Stranded-cost allocation: headquarters costs, IT, HR — when individual segments are sold, these often stay fixed at the HoldCo → reducing the remaining value.
- Tax implications of asset sales: book-value differences trigger a tax charge or the use of tax losses.
- Disposal-sequence effect: the first sales often fetch more attractive prices; later sales happen under pressure.
Deep diveShow more details
Example
a distressed specialty-materials group — the specialty subsidiary valued at going-concern EV, the rest of the holding at liquidation.
Pitch tip
'In distressed SOTP the 'disposal sequence' is critical — you sell the crown jewels first.'