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Global GT LP v. Golden Telecom, Inc., C.A. No. 3698-VCS (Del. Ch. Apr. 23, 2010) (Vice Chancellor Strine)

April 23, 2010

In this post-trial appraisal decision, Vice Chancellor Strine declined to give any weight to the merger consideration when determining fair value because there was no open market check that provided a reliable insight into the value of Golden Telecom, Inc., a Russian-based telecommunications company (“Golden”). The Court also rejected Golden’s argument that the merger consideration should be considered fair value because only one investor brought an appraisal claim. Relying on a discounted cash flow analysis, the Court used a new method of calculating equity risk premium to appraise the fair value of Golden at $125.49 per share, which was approximately $20 per share more than the merger price.

In refusing to consider the merger consideration as evidence of fair value, the Court distinguished precedent such as Union Ill. 1995 Inv. Ltd. P’ship v. Union Fin. Group, Ltd., 847 A.2d 340, 357-58 (Del. Ch. 2004) (“an arms-length merger price resulting from an effective market check is entitled to great weight in an appraisal”) on the basis that Golden did not conduct any active market check either before or after the merger agreement was signed. The Court also declined to determine fair value based on the size of the appraisal class because Section 262 of the DGCL does not support such an analysis; rather, the Court reasoned that it should not speculate about the reasons for the size of an appraisal class because such reasons could be numerous and varied.

In making its determination of fair value, the Court did not accord any weight to the comparable companies analysis or the comparable transactions analysis performed by the parties’ respective experts because each expert agreed that there were very few comparable companies or comparable transactions. Instead, because the Court agreed with both experts that Golden’s projections were reasonable, the Court determined fair value by resolving the disagreements between the experts’ discounted cash flow analyses.

The experts disagreed about the appropriate terminal growth rate, tax rate, equity risk premium, and the beta to use in calculating a discount rate. The Court relied on Golden’s projections, evidence in the record about the telecommunications industry in Russia and internationally and the predicted future of the Russian economy to determine the terminal growth and tax rates. Petitioners’ expert advocated new methods of ascertaining the appropriate equity risk premium and the appropriate beta for calculating the cost of equity capital. The Court followed the new approach for determining equity risk premium, but rejected the new method of calculating beta.

To determine equity risk premium, Golden’s expert relied upon historic estimates published by Ibbotson Associates, a leading authority on asset valuation. The Court recognized that previous Court of Chancery decisions had used this approach, but was convinced by petitioners’ expert that the professional and academic valuation community, including Ibbotson itself, has embraced an alternative model that accounts for supply estimates as a more reliable predictor of equity risk premium. The Court determined that this new model was the most reliable method available for use in an appraisal proceeding.

When determining the appropriate beta for calculating the cost of equity capital, the Court rejected petitioners’ beta, which was determined by a financial consultant, MSCI Barra, because (i) the Barra method is proprietary and therefore cannot be tested for reliability and (ii) it is not supported by professional literature. The Court emphasized that it did not reject future consideration of the Barra method, but held that if it were to be used in appraisal proceedings, a more detailed and objective record of how it works and why it is superior to other methods must be presented. The Court determined the appropriate beta by giving 2/3 weight to the historic beta calculated by Bloomberg and 1/3 weight to the composite beta calculated for the telecom industry by Ibbotson. The Court held that this calculation accounted for the fact that Golden presently operates in a riskier, emerging, high-growth market, but also accounted for evidence that Russia is normalizing and Golden was a stable company.

The Court ultimately determined the fair value was $125.49 per share, which was $20.49 per share higher than the merger price, and awarded interest at the statutory rate of 5% over the Federal Reserve Discount Rate.

The full opinion is available here