Marriage Value

Marriage Value is the financial equivalent of a power couple—when two entities join forces, their combined worth becomes greater than what they had individually. It’s the surplus value created when two or more separate interests in an asset are unified under a single owner. This concept is most commonly found in the world of real estate, specifically when a tenant holding a leasehold (the right to use a property for a set period) and a landlord owning the freehold (the outright ownership of the property and the land it sits on) merge their interests. Separately, their hands are tied; the tenant has a ticking clock on their ownership, and the landlord's asset is encumbered by the lease. When these two interests are combined, the constraints vanish, unlocking a higher potential value for the property. This 'bonus' value that magically appears from the union is the marriage value.

The creation of marriage value isn't magic; it's the result of unlocking potential and gaining total control. When separate, both the landlord and tenant face limitations that depress the value of their individual stakes.

A leasehold interest, especially one with a short term remaining, steadily loses value. A freehold interest, while permanent, is less attractive to a new buyer if a long-term tenant is paying a low rent. By marrying the two, these limitations are removed. The property can now be sold with 'vacant possession,' which is far more valuable as the new owner has complete freedom. The new single owner can also undertake significant renovations, change the property's use, or redevelop it entirely—actions that were previously difficult or impossible.

Imagine you own the world’s best guitar strings, and your friend owns a beautifully crafted but stringless guitar. Separately, you both have nice but ultimately useless items. Your strings are worth a few dollars, and the guitar body might be a nice decoration. But when you combine them? You create a fully functional, high-quality instrument capable of creating beautiful music, worth far more than the sum of its parts. That increase in value is the marriage value.

Calculating marriage value is a straightforward concept, though the actual valuation of each interest can be complex and often requires a professional surveyor.

The formula is simple subtraction: Marriage Value = Value of the Combined Interest - (Value of the Landlord's Interest + Value of the Tenant's Interest) For example, if a landlord’s freehold is worth €200,000 and the tenant’s leasehold is worth €150,000, their separate values total €350,000. If an expert determines that the combined, unrestricted property is worth €410,000, the marriage value is €60,000 (€410,000 - €350,000).

So, who gets this €60,000 windfall? It seems unfair for one party to get it all, as the value couldn't have been created without both of them. In many legal frameworks, such as the UK’s Leasehold Reform Act 1967, the law recognizes this and mandates that the marriage value be split equally between the two parties. In our example, the landlord and tenant would each be entitled to €30,000 of the created value.

While born in property law, the principle of marriage value applies beautifully to the corporate world, where it goes by another name: synergy.

When one company acquires another in a Mergers & Acquisitions (M&A) deal, the buyer almost always pays a premium over the target's market price. Why? Because they believe the combined company will be more valuable than the two were apart. This expected 'marriage value' or synergy is the entire justification for the deal. This value can come from:

• Cost Savings: Eliminating redundant departments (like two accounting teams), consolidating offices, and gaining greater purchasing power with suppliers.
• Revenue Growth: Cross-selling products to each other's customer bases, entering new markets, or combining technologies to create innovative new products.

For a value investing practitioner, the concept of marriage value is a powerful tool. It’s about more than just buying cheap assets; it’s about identifying situations where value is trapped and can be actively unlocked. A value investor might look for:

• A company with a hidden, non-core division that could be sold or spun off to a 'suitor' who can realize its full potential.
• Two competing companies in a struggling industry where a merger would create a single, more dominant, and efficient player.
• Real estate opportunities where leaseholds and freeholds can be acquired separately and merged.

Spotting potential marriage value requires looking past the current state of an asset and seeing what it could be. It’s the art of seeing a “1 + 1 = 3” equation where the rest of the market only sees two separate 1s.