Court of Chancery favors unaffected market price over other fair value indicators (Part 2)

BVWireIssue #203-1
August 7, 2019

shareholder dissent/oppression
expert testimony, discounted cash flow (DCF), merger price, statutory appraisal, multiple, synergy, market value, comparable companies method

When the Delaware Court of Chancery recently decided to rely on the unaffected market price for fair value, in a major statutory appraisal case, it provided an in-depth critique of the experts’ traditional valuation analyses, which valuators want to be familiar with. The court’s discussion of the expert’s DCF models is particularly informative. The court decided neither analysis was entirely convincing but adopted inputs from both for its own DCF model. The court then used its DCF value as corroboration of the market price.

‘Fantastically divergent conclusions’: This appraisal action arose out of the acquisition of Jarden Corp. by Newell Rubbermaid for cash and stock yielding a merger price of $59.21 per share. The unaffected market price, the court found, was $48.31 per share.

To determine fair value, the petitioners’ trial expert performed a comparable companies analysis as well as a DCF analysis and arrived at a per-share value of $71.35. Jarden’s (respondent’s) expert relied on the DCF analysis to arrive at $48.01 per share. (He only did a comparable companies analysis for “the sake of completion.”) The court’s DCF resulted in $48.13 per share.

The court gave no weight to the comparable companies value conclusions, finding the experts did not show that the peer companies were truly comparable. Regarding the experts’ DCF analyses, the court noted the “fantastically divergent” values the experts achieved, calling this “the classic case where … very-well credentialed experts are miles apart.”

In searching for an explanation, the court noted that the experts’ disagreement over the terminal investment rate (TIR) accounted for 87% of the difference in the DCF valuations. The petitioners’ expert calculated a TIR of only 4.9%, whereas Jarden’s expert calculated a TIR of 33.9%.

The petitioners’ expert argued that Jarden’s expert improperly was “using accounting data as if it were economic concepts. That doesn’t work.” He said Jarden’s expert incorrectly assumed that any new investment post-projection period would not create any value. Also, Jarden’s expert improperly defined investments to include only working capital and capital expenditures, which did not account for real-world economics. And Jarden’s expert defined investment as investment above depreciation, which again was an accounting definition that did not fit when calculating TIR. Finally, in calculating WACC, Jarden’s expert used accounting rates of return instead of economic rates of return, the petitioners’ expert said.

The court, in turn, found the petitioner expert’s rate was too low where Jarden’s five- year average historical investment rate was 21.6%. TIR, the court said, should reflect the company’s historical investment rate “but account for a slight increase to accommodate sustained growth in the Terminal Period.” The court calculated a TIR of 27.75%.

A digest of In re Appraisal of Jarden Corp., 2019 Del. Ch. LEXIS 271 (July 19, 2019), and the court’s opinion, will be available soon at BVLaw.

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