Colin Barry

Eddie Bauer in 2005 / Post-Bankruptcy Valuation (BAV, Monday, Week 9)


Eddie Bauer emerges from bankruptcy that stemmed mostly from problems with its parent company. EB has been on a downward slide for 5 years. How much is this thing worth?

Accounting Analysis:
Large chunk of balance sheet is Deferred Tax Asset (arises from NOLs, evaporates if company is sold) and Goodwill (big increase due to recapitalization/bankruptcy).
All real estate is operating leases: might want to make these capital leases...
Substantial reorganization expenses in '04 and '05, probably want to adjust if we use history to forecast future income statements.

"Fresh start" accounting: emerging from bankruptcy, assets and liabilities on balance sheet are adjusted to fair value (same as purchase accounting), mapped onto bankruptcy court's determination of the firm's value.
-- Assets that were fully depreciated (think factories) are not anymore. Income statement usually looks worse due to higher depreciation (more expenses). Competing incentives in measuring asset values:
===> Under-report value of assets: boosts future ROA
===> Over-report value of assets: better if owners want to sell soon; restructuring plan needs to be accepted by court/creditors (and that is more likely with more assets).

Financial Analysis:
No-good-very-bad historical performance.
BUT, means aggressive sales growth projections for the near future may be justified. Starting point is really low...

Abnormal earnings method is NOT really built for firms where book value = fair value.
Write-up in book value (goodwill) captures what we would otherwise try to model in a valuation. For Eddie Bauer valuation, almost everything in share price comes from beginning book value.
So if we think that some of the book value got arbitrarily written up (goodwill increase to make A = L + E), we probably want to either just value the firm at book OR do abnormal earnings but adjust for the increase...