96 | FINANCIAL STATEMENTS | Notes to the Consolidated Financial Statements
27. Other financial liabilities
31 December 31 December 2012 £m
2011 £m
Non-current: F&C REIT put option liabilities
Current: F&C REIT put option liabilities
Total other financial liabilities 30.0 3.8 33.8 41.5 3.8 45.3
The F&C REIT put option liabilities represent the fair value of the options to purchase the 30% interest in F&C REIT currently held by the minority interest partners in this business. The REIT parties have the right to require F&C to acquire all or part of their membership interests in F&C REIT at a valuation determined by an independent valuer, subject to an overall cap on F&C’s liability of £100.0m. Ivor Smith’s option is exercisable after the third anniversary of Completion and Leo Noé’s option is exercisable after the seventh anniversary of Completion. While Kendray Properties Limited does not have any direct right to require F&C to acquire its holding in F&C REIT, under the terms of the Partnership Agreement, Kendray cannot hold a greater interest in F&C REIT than the aggregate of Leo Noé’s and Ivor Smith’s interests (or the holder of their beneficial interests) and is therefore effectively required to transfer an element of its holding such that this requirement is achieved. The consideration for such a transfer would be fair value. Hence, in determining the gross liability of the option, Kendray Properties Limited’s entire holding in F&C REIT has been included. The reduction in the fair value of the F&C REIT put option liabilities of £11.5m during 2012 (2011: £8.7m reduction) has been released to the Income Statement as detailed in note 6(b).
An external valuation of the F&C REIT business is performed at each reporting date to enable a fair value to be placed on the F&C REIT put option liabilities.
The average of three valuation methodologies (equally weighted) was used to place a fair value on the F&C REIT business, namely: 1. Discounted cash flow method 2. Market earnings before interest, taxation, depreciation and amortisation (EBITDA) multiple 3. Fixed EBITDA multiple The main assumptions used in the valuation methodologies are: (a) Projections of the profit and loss for F&C REIT: Net new business:
Revenue growth: Cost inflation:
(b) Discount rates: 3.5% per annum and 5.25% per annum for staff costs
12.5% on recurring cash flows 25.0% on non-recurring cash flows
(c) Perpetuity growth rates: 3.0% for recurring cash flows 3.0% for non-recurring cash flows
(d) Earnings multipliers:
9.0 x recurring EBITDA 3.0 x non-recurring EBITDA
Based on the F&C REIT approved budget for year one, with management forecast projections for the subsequent four years 3.0% per annum
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