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February 2017 | Issue 84 Introduction A Delaware Chancery appraisal case involving computer company Dell Inc. gave rise to a multitude of valuation measurements.  It is instructive to see how the court sorted through them in coming up with its final appraisal conclusion.  The case is In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS […] More...

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Delaware Appraisal Case Becomes a “Battle of the Projections.”

October 2013 | Issue 69

Towerview LLC et al. v. Cox Radio, Inc., C. A. No. 4809-VCP (Del. Ch. June 28, 2013) is a Delaware appraisal case. The dissenting shareholders (“petitioners”) of Cox Radio, Inc. (“CXR”) sought to receive more than the $4.80 per share offered in a May 29, 2009 merger of CXR into its majority shareholder, Cox Enterprises, Inc. The petitioners’ valuation expert maintained that the petitioners’ shares in CXR had a fair value of between $11.05 and $12.12 per share.


Cox Radio, Inc., headquartered in Atlanta, Georgia, owned, operated or provided services for 86 radio stations clustered in 19 markets. It was a public company, 78% owned by Cox Enterprises, Inc. CXR had an operating cash flow in 2007 of about $160 million.

Owing to the onset of the Great Recession, the company’s cash flow declined by about 20% in 2008, and was projected at the time of the merger to decline an additional 40% in 2009.

The Valuation Issues

The parties were in agreement on a number of the valuation issues in the case. For example, the valuation experts for both sides agreed that the discounted cash flow (DCF) approach to value was the proper method to value the CXR shares. They were also in close agreement as to the proper discount rate to use to discount the projected cash flow, 8.1% and 8.0% for petitioners and respondent, respectively.

They were also in agreement about using management’s cash flow projections for 2009 as the starting year of their DCF analysis. Furthermore, they agreed that the company’s results would improve in the years after 2009. What they had a spirited disagreement about, however was the rate at which post-2009 cash flow would improve. This disagreement made for a large difference in their valuation conclusions.

Petitioners’ Position

Petitioners’ expert projected a sharp rebound in operating cash flow for CXR from 2009 to 2010. He relied in part on economist Milton Friedman’s “Plucking Theory.” According to this theory, a large contraction in economic output tends to be followed by a large business expansion, while a mild contraction is followed by a mild expansion. Based on this theory, petitioners’ expert assumed that the steep recession that the radio industry experienced in 2008 and 2009 would be followed by a steep recovery. Petitioners’ expert projected a 70% improvement in cash flow between 2009 and 2011.

Respondent’s Position

Respondent’s expert began his cash flow projection at the same level as petitioners’ for 2009. He chose, however, to grow it in the succeeding years by 4.6% for each year of the 2009-2013 projection period. This growth rate was selected because it was similar to the growth rate experienced by the company in the three or four years following the 2000/2001 recession. Thus, instead of petitioners’ projected 70% increase in operating cash flow from 2009 to 2011, respondent’s expert projected about a 9% increase.

Respondents attacked petitioners’ use of the Plucking Theory to foretell large year-to year increases in operating cash flow. They argued that there was no data establishing a close correlation between the growth rate of GDP and that of the radio advertising industry. They also pointed to some growth problems that were unique to the radio industry that would create a damper on future growth. These included competition from new media such as MP3 players and satellite radio.

What the Court Decided

The Vice Chancellor hewed to a middle course, crafting a projection that incorporated a 9.28% growth rate for 2010, followed by a 4.6% year-to-year growth rate in years 2011-2013.

After a few minor adjustments for other matters, he concluded a fair value for the CXR stock on the date of the merger of $5.75 per share.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) addressed herein.