In re Appraisal of DFC Global Corp., C.A. No. 10107-CB (Del. Ch. July 8, 2016) (Bouchard, C.)
In this post-trial statutory appraisal decision, Chancellor Bouchard held that the fair value of the stock of DFC Global Corporation (“DFCG” or the “Company”) was 71 cents per share higher than the $9.50 per share deal price paid to DFC Global stockholders when the Company was sold to Lone Star Fund VIII (U.S.), LLP (“Lone Star”), a private equity buyer, in June 2014. In determining that DFCG’s fair value was $10.21 per share, Chancellor Bouchard used a blend of three common valuation methodologies – discounted cash flow (“DCF”) analysis, multiple-based comparable company analysis, and the deal price – concluding that an equal weighing of the three was the most reliable determinant of fair value.
In April 2012, DFCG engaged Houlihan Lokey Capital Inc. to investigate a sale of the Company to a financial sponsor. The decision to sell the Company was spurred, in part, by increased regulatory scrutiny, high corporate leverage, and questions regarding management succession. Over the next two years, DFCG was shopped through a robust sales process in which forty-three financial sponsors and three potential strategic buyers were contacted. In February 2014, Lone Star offered to buy DFCG for $11.00 per share. After DFCG disclosed downward revisions to its financial projections based on regulatory uncertainty, Lone Star lowered its offer to $9.50 per share. DFCG accepted Lone Star’s revised offer, and the deal closed on June 13, 2014.
Following the announcement of the transaction, five DFCG stockholders, which collectively owned 4,604,683 shares of DFCG common stock, filed separate petitions for appraisal under 8 Del. C. § 262. After consolidating the petitions, the Court held a three-day trial in October 2015 featuring a battle of financial experts. The petitioners’ expert calculated a fair value of $17.90 per share using a DCF model based on management’s projections, while DFCG’s expert used a DCF model and a multiples-based comparable companies analysis, blending the two approaches to arrive at a much lower value of $7.94 per share. DFCG also urged the Court to consider the transaction price of $9.50 as the most reliable evidence of fair value.
The Court acknowledged that it has broad discretion in an appraisal proceeding to consider all relevant factors when determining fair value and the discretion to use the valuation methods it deems appropriate, including the parties’ proposed valuation frameworks, or one of the Court’s own making. The Court made clear, however, that it must limit its valuation to the firm’s value as a going-concern and exclude the speculative elements of value that may arise from the accomplishment or expectation of the merger. With that legal framework in place, the Court began its analysis of DFCG’s fair value.
Observing that the transaction “was negotiated and consummated during a period of significant company turmoil and regulatory uncertainty, [which] called into question the reliability of the transaction price as well as management’s financial projections”, the Court determined that a blend of the “three imperfect techniques” was the most reliable determinant of fair value. According to the Court, the series of adjustments to DFCG’s financial projections – upon which both the Court’s and the expert’s DCF models were based – rendered a DCF analysis less than fully reliable. The Court acknowledged that while it frequently defers to the transaction price when it is the product of an arm’s length process and a robust bidding environment, the transaction price is “reliable only when the market conditions leading to the transaction are conducive to achieving a fair price.” Lone Star purchased the Company at a time when DFCG’s performance was declining, with its future performance depending on the outcome of regulatory decision-making that was out of the Company’s control. These circumstances, according to the Court, made the transaction price less than fully reliable as an indicator of DFCG’s fair value.
Although each valuation method suffered from various limitations stemming from the regulatory uncertainty that the Company faced, the Court concluded that each method provided meaningful insight into DFCG’s fair value. For this reason, the Court decided to weigh each valuation method equally, arriving at a price of $10.21 per share.