December 2013 | Issue 70
Introduction
In a recent Delaware dissenting shareholder case, Vice Chancellor Glasscock was called upon to perform a statutory appraisal in order to determine the fair value of the stock of a company involved in a merger. Instead of using the methods normally employed to perform such an appraisal, such as discounted cash flow (DCF), comparable public companies or comparable transactions, however, the judge plunged straight into the heart of the matter and used as his measure of fair value the actual purchase price of the subject company. The case is Huff et al. v. CKx, Inc. C.A. No. 6844-VCG (November 1, 2013).
The Company
CKx, Inc. was a publicly-traded NASDAQ company. The company owned and maintained iconic entertainment properties. Significant assets included the number-one-rated television show, American Idol, as well as the dance show So You Think You Can Dance. The company also owned rights to the names, images and likenesses of Elvis Presley and Muhammad Ali. American Idol and its related assets, which were distributed through the Fox Network, were responsible for 60-75% of CKx’s cash flow.
The Merger
The process leading up to the sale of CKx took place over a period of about three or four years. It began in 2007 with an offer by Robert Sillerman, the company’s largest shareholder, to buy out the public shareholders at $13.75 per share. This offer collapsed, however. The company subsequently executed eight confidentiality agreements with other potential buyers. No transaction arose out of any of these inquiries. In October 2010, the company decided to take down the “for sale” sign and refocus itself on a strategy of making acquisitions.
CKx’s announcement that it had taken down its for sale sign seemed, however, to have the consequence of eliciting renewed acquisition interest from private equity funds. During a five day period in May of 2011, three private equity funds made offers. The offer prices were $4.50, $4.75 and $5.00 per share.
After receiving these offers, the CKx board decided to try to wrap up a sale. It hired Gleacher and Company to run an auction among these three bidders and other interested buyers. The completed auction resulted in two bids, both from financial buyers. One was from Apollo at $5.50 per share and one was from Party B at $5.60 per share. The board ultimately accepted Appolo’s lower bid because its financing was less uncertain.
The Appraisal Action
Dissenting shareholders filed an appraisal action. Petitioners’ expert, Robert Reilly, used three valuation methods; discounted cash flow (DCF), guideline public company method and guideline merged and acquired company method. He concluded that the CKx stock had a fair value of $11.02 per share.
Respondent’s expert, Jeffrey Cohen, conducted a discounted cash flow analysis and concluded that the value of CKx was $4.41 per share.
The Court’s Analysis
The petitioners’ expert assigned 40% of the weight in his appraisal to the guideline company approaches to valuation. The court decided not to place any reliance on the guideline company approaches owing to the lack of similarity between the guideline companies and CKx. None of the guideline companies, for example, were of comparable size; none owned similar assets or competed with CKx or used a similar business model.
With the guideline approaches eliminated, the valuation process was reduced to an analysis of the experts’ respective DCF calculations. One of the largest sources of disagreement between the experts was the estimates that each made for the future revenue to be generated from the renewal of the company’s contract with Fox for distribution of American Idol. The respondent’s expert had assumed a modest 4% per annum growth in revenue from this property. Petitioners’ expert, on the other hand, had adopted a far more ambitious set of management projections that foresaw an annual increase in revenues from this property of $20 million.
The court had little confidence in either set of projections. It pointed out that the projected $20 million increase in licensing fees from Fox was not prepared in the ordinary course of business, and was otherwise unreliable. Said the court, ”I do not have any basis to determine whether cash flows under that contract would have increased by $20 million per year, $0 per year, or some figure in between.”
The Conclusion
The court concluded that it could not employ the DCF method to reach a decision. It decided instead to rely primarily on the result of the actual sale auction to determine fair value. The Vice Chancellor seemed to be influenced in this direction by his belief that the auction process was open, thorough and effective. Also, the court believed that there was little or no synergy in the transaction, owing no doubt to the fact that the buyer was a financial buyer. The court did, however, allow in its opinion for a process whereby the parties could account for any excludable synergy that might be imbedded in the transaction price.
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