Bouchard Uses 'Imperfect' Blend of Metrics in Valuation Dispute
Delaware Business Court Insider
July 11, 2016
Andre G. Bouchard, Chancellor,
Chancery Court of Delaware.
to significant regulatory uncertainty and a depressed market, the
Delaware Court of Chancery considered three factors to determine that
a private equity firm underpaid for DFC Global Corp. when it bought
the payday lender for $9.50 per share in 2014.
market turmoil called into question the reliability of the transaction
price as the fair value for the merger, Chancellor Andre G. Bouchard
gave equal weight to his own discounted cash flow analysis, an
expert's comparative companies analysis and the actual deal price to
conclude that DFC should actually have been valued at a price of
$10.21 per share in April 2014.
of three imperfect techniques," Bouchard said, was reflective of an
arm's-length and robust sales process, set against the backdrop of a
regulatory crackdown on the payday lending industry that muddied
efforts to determine a fair price for DFC.
"Importantly, DFC was unable to chart its own course; its fate rested
largely in the hands of the multiple regulatory bodies that governed
it," the chancellor said in a 65-page opinion dated July 8. "Even by
the time the transaction closed in June 2014, DFC's regulatory
circumstances were still fluid."
uncertainty had caused DFC to repeatedly reduce its projects in the
leadup to the merger, cutting its 2014 forecast between 25 percent and
35 percent in a matter of months. The company also noted that pending
regulatory changes made it impractical to project earnings per share
at the time.
Lone Star Fund VIII, a private equity firm with holdings across the
globe, saw an opportunity to swoop in and buy the company at a
favorable price amid the chaos.
closed April 1, sparking a lawsuit to stop the transaction and, now,
an appraisal action by dissenting investors holding more than 4.6
million shares of DFC common stock.
petitioners pushed the court to embrace their own calculations, which
valued the company at $17.90 per share by accounting only for a
discounted cash flow analysis based on five-year projections.
the other hand, blended its own discounted cash flow analysis with a
multiples-based comparable companies analysis to value the company at
$7.94 per share. The respondents also argued that the $9.50-per-share
transaction price was the most reliable evidence of fair value.
divergent numbers were not unusual for the court, which is often
tasked with determining fair value in order to "compensate dissenting
stockholders for what was taken from them." But the unique tactic the
court employed highlighted the unique circumstances of the sale, which
Bouchard said warranted a framework of his own making.
discounted model, usually a strong indicator of fair value, was not
sufficient by itself to determine DFC's value; nor should it be given
special weight, Bouchard said.
"Consequently, although a discounted cash flow analysis may deserve
significant emphasis or sole reliance in cases where the court has
more confidence in the reliability of the underlying projections than
in the transaction price, I do not believe it merits a
disproportionate weighting in this case," he said
chancellor weighed his $13.07 per share discounted cash flow
calculation evenly with a DFC expert's $8.07 comparative companies
analysis and the actual $9.50 deal price.
models, Bouchard said, had their own inherent limitations; however,
taken together, they represented the best method for analyzing the
view, each of them still provides meaningful insight into DFC's value,
and all three of them fall within a reasonable range," he said.
at one-third each the discounted cash flow valuation of $13.07 per
share, the multiples-based valuation of $8.07 per share, and the
transaction price of $9.50 per share, I conclude that the fair value
of DFC at the time of the transaction was $10.21 per share."
petitioners in the case, captioned
In re Appraisal of DFC Global, were represented
by Geoffrey C. Jarvis, formerly of Grant & Eisenhofer. Jarvis, now
with Kessler Topaz Meltzer & Check, was not immediately available to
comment. And co-counsel Kimberly A. Evans of Grant & Eisenhofer did
not immediately return a call.
represented by Raymond J. DiCamillo, Susan M. Hannigan and Rachel E.
Horn of Richards, Layton & Finger and Meryl L. Young and Colin B.
Davis of Gibson, Dunn & Crutcher in Irvine, California. Members of
DFC's legal department did not immediately respond to calls seeking
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