August 3, 2018
Appraisal: DCF Lives On – But Appraisal Arbs Still Have a Bad Week
This recent blog from Fox Rothschild’s Carl Neff reviews the Chancery Court’s decision last week to rely on a DCF analysis, instead of the merger price, in an appraisal proceeding. Here’s a excerpt:
In the recent decision of Blueblade Capital Opportunities v. Norcraft Company, Inc., C.A. No. 11184-VCS (Del. Ch. July 27, 2018), Vice Chancellor Slights found that “the evidence reveals significant flaws in the process leading to the Merger that undermine the reliability of the Merger Price as an indicator of Norcraft’s value.” Slip op. at 3. This is so because the Court found that there was no pre-signing market check, that Norcraft and its advisors “fixated on Norcraft and never broadened their view to other potential partners”, and that Norcraft’s lead negotiator “was at least as focused on securing benefits for himself as he was on securing the best price available for Norcraft.” Id.
Accordingly, the Court declined to rely upon deal price, but instead determined fair value by turning to the discounted cash low analysis presented by the parties, and “borrowed the most credible components of each expert’s analysis to conduct [the Court’s] own DCF valuation”. In so doing, the Court’s DCF valuation yielded a fair value of $26.16 a share, up slightly from the deal price at $25.50 a share.
While the plaintiffs didn’t exactly hit the jackpot, the Court’s decision is another indication that reports of DCF’s demise in appraisal proceedings are at least somewhat exaggerated.
Still, it wasn’t a good week or so for appraisal arbs – even DCF only got them a little more than a 2% bump in Norcraft. Worse, as this Seyfarth Shaw memo points out, the Chancery’s use of the merger price as a valuation guidepost in its subsequent decision in the Solera appraisal left them holding the bag with a valuation that, after deducting synergies, was 3% lower than the deal price.
– John Jenkins