Canary Wharf case analysis – valuer assessment and market capitalisation.
Canary Wharf case analysis – valuer assessment and market capitalisation: AN INTRODUCTION
1. Situation Brief
After the successful initial public offering in April 1999, Mr Johnson, CFO of Canary Wharf, was worried about the large difference between the book value of its properties from the valuers’ assessment and its market capitalisation. According to the assessment, the book value of the shareholders’ funds is one billion pounds less than its market value. A major reason for this difference is that the valuers had taken into account the option contracts with Citibank, in which Canary Wharf might lose some value. In other words, Canary Wharf has negative real option value in a series of option contracts (puts) with Citibank. Mr Johnson wondered whether the valuers should also take into account the real options Canary Wharf holds on its properties held for development, which may lift the figures in the assessment. And he suggested to consider the specific volatility of the property values and the construction costs, because he believes real call options are more valuable the higher the expected volatility of underlying assets. With regard to the real call options, he also thought about hedging the development option elements.