Bouchard Uses 'Imperfect' Blend of Metrics in Valuation Dispute

Tom McParland, Delaware Business Court Insider

July 11, 2016
 

Pointing 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.

Because 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.

The "blend 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."

The 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.

However, 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.

The deal 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.

The 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.

DFC, on 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.

The wildly 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.

The 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

The 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.

All three models, Bouchard said, had their own inherent limitations; however, taken together, they represented the best method for analyzing the deal.

"In my view, each of them still provides meaningful insight into DFC's value, and all three of them fall within a reasonable range," he said.

"Weighing 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."

The 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.

DFC was 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 comment.

Tom McParland can be contacted at 215-557-2485 or at tmcparland@alm.com.