Grant Samuel’s full 187-page Independent Expert’s Report on Coles Group was finally released on Monday. The Report notes that while Wesfarmers’ offer “does not deliver a full premium for control” shareholders are better off voting in favour of the deal. Grant Samuel values Coles at between $16.21 and $18.23 per share. The only thing is, the Expert noted that “the valuation range exceeds the price at Grant Samuel would expect Coles Group shares to trade in the absence of the Wesfarmers proposal.”

In short, what Grant Samuel effectively said was that – “We think the company is worth $20 billion – the only problem is, no one who is actually willing to spend money to buy Coles shares thinks that.”

Grant Samuel’s valuation is based on both a discounted cash flow model (which is highly subjective and can be wildly affected by the forecast growth rates and discount rates assumed) and the capitalisation of earnings method (which involves a comparison of multiples such as EBIT, EBITDA and net profit with comparable companies).

In relation to the discounted cash flow (or DCF) method, Grant Samuel itself noted “the NPV [net present value] is typically extremely sensitive to relatively small changes in underlying assumptions, few of which are capable of being predicted with accuracy, particularly beyond the first two or three years.” For example, if you were to adopt a 1 percent lower discount rate and a 1 per cent higher revenue growth assumption, the valuation of the Coles’ supermarket division under Grant Samuel’s model differs by more than $4 billion.

Translation – the best valuation method we have ain’t that good. (Given that Coles weren’t able to forecast revenue correctly six months out last year, it is also questionable how accurate its budgeted revenues are for 2012).

In using the capitalisation of earnings method Grant Samuel used a median PE of 26 for Coles. Largely based on its turnaround prospects, Grant Samuel has found that Coles should be valued (inclusive of a control premium) on a similar basis to Woolworths (PE of 26.14), and be far more expensive than David Jones (PE of 22), Wal-Mart (PE of 14.9) and Home Depot (PE of 13.1).

This is not meant to be a criticism of Grant Samuel, which prepared a thorough and complete valuation, but rather, a question as to why the law requires the preparation of an expensive called ‘independent’ valuation of a company (or where the law doesn’t require a valuation, why companies invariably pay millions to have one done). Why is the view of one ‘expert’ more valuable than the view of the market, which is continually assessing the value of every listed company?

Prior to receiving an offer from KKR in August 2006, Coles’ one month VWAP was $11.16. That was the value which hundreds of thousands of investors (including professional investors and fund managers) placed on the company. That value was also made before Coles management blundered the Bi-Lo conversion. One year later, according to Grant Samuel, and based on valuation methods which are extremely subjective, the company is now apparently worth $17.22 per share – 54 percent more. While Grant Samuel’s valuation includes a control premium of up to 25 percent, it is a great deal more than what anybody else thought the company was worth 12 months ago.