In a recent appraisal action arising out of Apollo Global Management LLC's 2011 acquisition of CKx, Inc,(1) the Delaware Court of Chancery found that the $5.50 per share deal price was the best measure of CKx's fair value at the time of the transaction – a departure from the typical practice of relying on discounted cash flow valuations.
After the CKx transaction closed, Huff Fund Investment Partnership, a 15% stockholder of CKx, sought appraisal for its shares. Both Huff and CKx submitted expert valuations regarding the fair value of CKx shares at the time of the transaction. Huff's expert claimed that CKx's shares were worth twice the deal price ($11.02), while CKx's expert argued that they were worth only $4.41 per share. Both valuation experts relied on a set of CKx's five-year management projections prepared in connection with the transaction, even though there was substantial evidence that those projections were "optimistic" and not the best estimate of CKx's future performance. More specifically, the management projections included a substantial assumption about whether CKx's primary asset – the television show American Idol – would receive a $20 million increase in licensing fees from 20th Century Fox in its next broadcasting contract.
Huff's expert also prepared comparable companies and comparable transactions valuations, which were based on a variety of inapposite companies and transactions.
Following a three-day trial, the court concluded that none of the expert valuations were accurate assessments of CKx's fair value. It concluded that because CKx was a holding company that included an assortment of otherwise unrelated entertainment properties (including American Idol, as well as rights to the name and likeness of Muhammad Ali and Elvis Presley), the companies and transactions identified in Huff's expert's comparables valuation were not appropriate comparables. It also found that both experts' discounted cash flow valuations were flawed because they relied on the flawed management projections. Given those findings, and the fact that CKx was sold after a "full market canvas and auction", the court found that the deal price was a "reliable indicator of value" and used it to determine CKx's fair value. In so doing, the court stated that in most other legal contexts, market value is the best evidence of actual value, and after-the-fact valuations are merely "educated guesses as to what price could be achieved" in a sale.
The adoption of the deal price as the appropriate measure of fair value runs contrary to the traditional emphasis on discounted cash flow valuations and recent opinions from the Delaware Supreme Court and the Delaware Court of Chancery in Golden Telecom and Merion Capital that expressly declined to adopt deal price as an appropriate measure of fair value. However, unless there are additional cases in Delaware that follow CKx, the unique assets at issue may limit the influence of the case.
For further information on this topic please contact Peter L Welsh or Jane D Goldstein at Ropes & Gray LLP's Boston office by telephone (+1 617 951 7000), fax (+1 617 951 7050) or email ([email protected] or [email protected]). Alternatively, contact Jason Freedman or Robert Moreno at Ropes & Gray LLP's San Francisco office by telephone (+1 415 315 6300), fax (+1 415 315 6350), or email ([email protected] or[email protected]).The Ropes & Gray LLP website can be accessed at www.ropesgray.com.
Endnotes
(1) Huff Fund Inv P'Ship v CKx, Inc, CA 6844-VCG (Del Ch Nov 1, 2013).
