The AriZona case—the largest corporate dissolution case ever in New York—is the subject of an extensive and engrossing analysis by Z. Christopher Mercer (Mercer Capital). Mercer was a valuation expert in the case and is one of the top thought leaders in the profession. While the matter was pending, he was unable to write about it. But now that the parties have privately settled the matter, he is free to discuss it. The case incorporates many valuation issues and demonstrates the often bewildering decisions made by the individuals in black robes.
A puzzlement: The New York Supreme Court had to determine the fair value of a combined 50% interest in AriZona, a private company known for its iced tea and other beverages. The two parties at odds were the founders of the company and each owned half of the firm. The court concluded that the company should be valued using the “financial control” level of value, even though seemingly clear guidance in the Beway case (case citations are included in the article) indicates that the strategic control level should be used. The court’s conclusion “is not reconciled with the plain language of Beway,” Mercer writes. Using the financial control level of value, Mercer’s side came up with $2.4 billion versus the opposing side’s $426 million using a “business as usual” standard (which the court rejected).
The decision over the level of value was the first in a series of what some may see as baffling decisions. For example, the court focused solely on a discounted cash flow valuation, even though Mercer’s side felt that there were a number of comparable public companies to support a valuation at the financial control level. The difference was relatively minor (Mercer’s side weighted the DCF at 80%), but the court disagreed that the companies were comparable. In focusing on the DCF method, the court examined the DCF components: revenue, costs, terminal value, tax amortization benefit, tax rate, key man discount, discount rate, outstanding case, nonoperating assets and debt, and—last but certainly not least—discount for lack of marketability.
No sense: The position of Mercer’s side was that a 0% DLOM was applicable, citing a number of New York cases in support. The opposing side argued for 35%, citing the Longstaff model (ignored by the court) and the Silber study, as well as several minority interest studies. In the end, the court used a 25% DLOM. Its treatment of the DLOM “does not make sense from my perspective as a business valuer and a businessman,” Mercer writes.
One factor in support of a zero DLOM—and there are others discussed in Mercer’s article—was that there were several interested and capable buyers (including Coca-Cola and Nestlé) who made informal offers (prior to the valuation date) ranging from $2.9 billion to more than $4 billion for 100% of the company. The court’s 25% DLOM lowered the value by $478 million, a “tremendous price for so-called lack of marketability” given the “obvious” existence of suitors who wanted to buy the company.
Mercer provides a substantial amount of additional analysis on these and other valuation issues—we urge everybody to read it. BVR’s legal analysis of Ferolito v. AriZona Beverages USA LLC, 2014 N.Y. Misc. LEXIS 4709 (Oct. 14, 2014), along with the court’s opinion, is available at BVLaw.
Extra: The AriZona case highlights the fact that New York is the only state that allows DLOM at the shareholder level in fair value cases. This “obsolete” position “harms dissenters by transferring value to continuing shareholders,” writes Gil Matthews (Sutter Securities) in an article that examines New York’s DLOM situation in the upcoming December issue of Business Valuation Update.