Huff Fund Inv. P’ship v. CKx, Inc., C.A. No. 6844 (Del. Ch. Nov. 1, 2013) (Glasscock, V.C.)
In this post-trial memorandum opinion, Vice Chancellor Glasscock conducted an appraisal proceeding in which he found that the price paid in the acquisition of CKx, Inc. (CKx or the “Company”) by Apollo Global Management was a reliable indicator in determining fair value. After ending an unsuccessful sales process, the CKx board of directors (the “Board”) received indications of interest that led to a merger with Apollo at $5.50 per CKx share. Dissenting CKx stockholders (the “Dissenting Stockholders”) used greater cash-flow projections and long-term nominal growth, and a different weighted-average cost of capital, in arriving at a valuation of $11.02 per share. Because both parties’ expert valuations were based on inapplicable comparables and unreliable projections, the Vice Chancellor found that neither valuation was reliable, and used the merger price as the best available determinant of value.
CKx was a publicly traded company listed on NASDAQ, formed by Robert F.X. Sillerman, and engaged in an active acquisition strategy. In 2007, Sillerman offered to buy the Company for $13.75 per share. Although financing for his offer deteriorated along with overall market conditions, several other interested parties entered into confidentiality agreements to explore a possible acquisition of the Company. A sale seemed imminent for three years, until CKx concluded that the process was limiting its ability to execute its acquisition strategy, and the Company announced that it was no longer for sale. By 2011, CKx generated 60-75% of its cash flow from its rights to the television show American Idol (“Idol”), but Idol’s ratings had declined for five seasons, and the network distribution agreement with Fox was set to expire. CKx then sought to purchase Sharp Entertainment (“Sharp”), a production company that expected to double its operating income that year.
Interest for CKx also returned, and in mid-2011 Apollo and two other bidders submitted offers at between $4.50 to $5.00 per share. The Board retained Gleacher as its financial advisor and Gleacher solicited bids from three financial buyers and nine strategic acquirors. CKx management prepared five-year projections (the “Management Projections”) which included assumptions – later described by CKx management as optimistic – that the Company could renegotiate its Idol contract with Fox to generate additional annual revenue of $20 million. At the conclusion of the sales process, the Board accepted Apollo’s $5.50 per share offer. The Board rejected another bidder’s higher offer of $5.60 per share because its financing was uncertain and it did not provide specific performance rights to CKx. One member of the Board dissented, and the subsequent class action litigation settled in exchange for additional disclosures and a slight modification to the termination fee.
The expert for the Dissenting Stockholders, Robert Reilly, used a discounted cash flow (“DCF”) method, comparable publicly traded company method, and comparable merged and acquired company method, while the Company’s expert, Jeffrey Cohen, used a DCF method. Reilly valued the CKx shares at $11.02 per share, and Cohen valued at $4.41 per share. The difference was the result of three different assumptions: cash flow projections, terminal value in the DCF analyses, and betas and size premia for the Company’s weighted-average cost of capital (“WCAC”). Reilly used the revenue forecasted in the Management Projections and a long-term nominal growth rate of 4% while Cohen disregarded the $20 million increase in the projections and a long-term growth rate of 0%.
The Vice Chancellor first disregarded Reilly’s comparable company and comparable transaction analyses, as Reilly admitted at trial that he found no companies that were comparable to CKx. Next the Vice Chancellor found that both DCF analyses were unreliable because the Management Projections were not created in the ordinary course of business and the unreliability of any estimate regarding the to-be-negotiated Idol contract. In the absence of reliable guidance, the Vice Chancellor used the merger price as “the best and most reliable indication of CKx’s value.” CKx engaged in a substantial pre-signing market canvas, aided by reputable financial advisors, free from any specter of self-interest or disloyalty. The Vice Chancellor distinguished Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214 (Del. 2010), finding that Delaware law permits consideration of all relevant factors including merger price. Because no comparable companies, comparable transactions, or reliable cash flow projections exist, the Vice Chancellor held that the sales price was the most relevant exemplar of valuation available. The Vice Chancellor granted the parties the opportunity to provide evidence concerning the existence and amount of synergies reflected in the merger price.