DealLawyers.com Blog

Here’s some commentary from Kevin Miller of Alston & Bird: A recent Delaware Chancery Court decision – In Re Sunbelt Beverage Corporation Shareholder Litigation – should be of significant interest to investment bankers as well as lawyers because of its detailed analysis of competing discounted cash flow and other valuation analyses as well as comments by the court that the fairness opinion rendered in connection with the transaction was “highly suspect.”

Investment bankers will be particularly interested in the discussions of small-firm risk premium, company specific risk premium and valuation adjustments for an anticipated Subchapter S conversion. Here are some takeaways:

1. Courts often view a discounted cash flow as the most reliable valuation methodology.

2. The prevailing party is often the party that sticks closest to the valuation approach advocated by the valuation literature (e.g., Ibbotson), only advocating variation when it has quantitative analytic support.

3. Company specfic risk premium are often suspect.

Here are some selected key quotes:

1. Fairness opinion

“Before the Merger was authorized, defendants obtained a fairness opinion for the proposed merger consideration of $45.83. Yet that fairness opinion itself is highly suspect. It was produced in approximately one week-during which the lead appraiser was busy working on at least one other matter that included a cross-country site visit and, thus, unable to work extensively and meaningfully with Sunbelt representatives-and just before the Sunbelt
board meeting at which the board voted to issue the Call and to authorize the Merger. The “fairness opinion” was a mere afterthought, pure window dressing intended by defendants to justify the preordained result of a merger at the Formula price of $45.83 per share.”

2. Comparability of other companies and transactions

“I do have doubts about the comparability of the companies included in [Goldrings’ expert’s comparable transaction] analysis. These doubts are driven by the differences in size between the comparables and Sunbelt, as well as the difference across product lines and geography. . . .
Even if the companies themselves were more comparable to Sunbelt than I am willing to find, [Goldrings’ expert] failed to account for important elements of specific transactions that stood to influence the accuracy of his calculations. . . .[Defendant’s expert] relied on his use of the median multiple approach to compensate for any shortcomings related to specific companies or
transactions. . . . I am not willing to rely on the employment of a median multiple approach as a justification for ignoring several known deficiencies in facts and methodologies. . . ”

3. Discounted Cash Flow Analysis – calculation of discount rates

“I prefer the option presented by Goldring and employed by [Goldring’s expert]: follow the strict language Ibbotson used to describe how it adjusted for small-firm premiums in its own publication, and apply a premium of 3.47% for companies in the ninth or tenth deciles. . . .”

4. Company specific risk premium

“[A]s Vice Chancellor Strine explained in one of the cases defendants cited, even though courts may approve the use of these premiums, “[t]o judges, the company specific risk premium often seems like the device experts employ to bring their final results in line with their clients’ objectives, when other valuation inputs fail to do the trick.”