Chancery Finds that Deal-Price-Less-Synergies was Best Indicator of Fair Value in Statutory Appraisal of Public Company
In re Appraisal of Regal Entertainment Grp., C.A. No. 2018-0266-JTL (Del. Ch. May 13, 2021)
Recent Delaware appraisal cases have found that reliable market indicators present the best evidence of a corporation’s “fair value.” Where the deal price itself provides the best evidence, the Court will deduct from the deal price any synergies paid to the sellers. Changes in value between signing and the closing date of the merger may also be taken into account. This decision applies these principles in determining the “fair value” payable to certain stockholders of Regal Entertainment Group, a public company, following its 2018 sale to Cineworld Group, a strategic acquirer, for $23 per share.
At trial, the parties presented three different valuation methodologies. Petitioners presented a discounted cash flow analysis indicating a fair value of $33.83 per share, and Cineworld asserted a fair value of $18.02 per share based on an equal weighting of the unaffected trading price and the deal price minus synergies.
Following the Delaware Supreme Court’s guidelines, the Court considered the DCF analysis as a second-best method due to the availability of market-based indicators, including that Regal was a widely-held, publicly-traded company, and that the transaction was conducted at arms-length and included a post-signing market check. Additionally, the Court noted that the DCF model relied on overly optimistic management projections that were not prepared in the ordinary course of business, and its valuation departed from the market-based indicators. Turning to Regal’s unaffected trading price, the Court concluded that while the trading market for Regal stock indicated several attributes of market efficiency to support fair value, other attributes (including the presence of a controlling stockholder, recent large block sales, and a relative price dip in 2017) rendered the trading price unreliable as an indicator of fair value.
The Court held that the most reliable indicator of Regal’s fair value was the deal price minus any value of the synergies arising from the accomplishment or expectation of the merger that were allocated to Regal’s stockholders in the deal price. The Court reasoned that the acquirer was an unaffiliated third party, the Regal board did not have conflicts of interest, there was ample public information and Cineworld had conducted due diligence, the parties had engaged in negotiations over price, and there was an active post-signing market check unencumbered by any exceptional deal protection measures. The Court rejected petitioners’ argument that the deal price was unreliable simply because there had been only one bidder. In deducting synergies, the Court identified what categories of operational and financial value arose from the merger and how much of that value Regal stockholders had captured in the negotiations over deal price. The Court then added to the deal-price-less-synergies metric the increase in Regal’s value achieved by the time that the deal closed due to the post-signing, pre-closing reduction in the federal corporate tax rate. After making these adjustments, the Court concluded that the fair value was $23.60 per share.Share