In this post-trial opinion, Vice Chancellor Parsons determined the fair value of petitioners’ stock in a statutory appraisal proceeding arising from the short-form merger of Cox Radio, Inc. (“CXR” or the “Company”), a partially owned subsidiary of Cox Enterprises, Inc. (“CEI”), with and into CEI’s wholly owned subsidiary, Cox Media Group. The petitioners, a group of CXR stockholders that held over 1.2 million shares of CXR common stock, rejected CEI’s tender offer of $4.80 per share and sought appraisal pursuant to 8 Del. C. § 262 in connection with the second-step, short-form merger. After trial, the Vice Chancellor held that the fair value of the petitioners’ shares was $5.75 per share.
After briefly addressing the petitioners’ evidentiary objections, the Vice Chancellor turned to appraisal of the fair value of the petitioners’ shares in the Company as a going concern as of the date of the merger. The petitioners alleged that the Company was undervalued because the radio industry would rebound from its low in early 2009, while the Company alleged that the radio industry would not recover to previous levels. Both parties’ expert witnesses agreed that the discounted cash flow (“DCF”)—and not the comparable transactions or comparable companies—analysis was the most reliable valuation method, but disputed whether the long range plan for 2009-2013 (the “2009 LRP”) prepared by CXR’s management remained realistic financial projections after CXR’s board approved it in December 2008.
The Vice Chancellor noted that CXR’s long range plans were consistently overoptimistic: for 2007 and 2008, CXR actually performed 35% and 45% below the projections from 2002 and 2003. Further, the Vice Chancellor noted that management’s May 2009 update to the 2009 LRP (the “May Forecast”) reduced the projections for earnings and operating cash flow by approximately 40%. After rejecting several of the petitioners’ arguments as to why CXR’s cash flows would have recovered to levels projected in the 2009 LRP, the Vice Chancellor found that management no longer believed the 2009 LRP to be realistic at the time of the merger. The Vice Chancellor thus rejected the projections utilized by the petitioners’ expert and adopted the DCF analysis of CXR’s expert as a starting framework.
The Vice Chancellor next addressed the appropriate growth rate to use in the DCF analysis. The Vice Chancellor found that the constant 4.6% growth rate used by CXR’s expert was proper for the 2011-2013 cash flow projections. However, because CXR experienced unusually large growth following the 2000/2001 recession, the Vice Chancellor found it more appropriate to expect that CXR would have greater growth immediately following the 2008 recession. Accordingly, the Vice Chancellor adjusted the Company’s growth rate for 2010 to 9.8%.
The Vice Chancellor then addressed each party’s calculations of the employee long-term incentive plan (“LTIP”) payments, debt, retained cushion, deferred taxes, and number of outstanding shares at the time of the merger. The Vice Chancellor largely adopted the approach of CXR’s expert as to these variables, but adopted the approach of the petitioners’ expert with respect to debt. As to determining the appropriate terminal value, the Vice Chancellor found that, because the radio industry is a mature industry, the Company’s terminal growth rate should be at least equal to the expected inflation rate. Thus, the Vice Chancellor adopted a terminal rate of 2.25%, which was slightly less than the projected rate of 2.5% used by the petitioners’ expert. The parties essentially agreed on the appropriate discount rate, and the Vice Chancellor adopted the 8.0% rate used by CXR’s expert, noting that it was slightly more favorable to the petitioners than the 8.1% rate used by their own expert.
For all of these reasons, the Vice Chancellor concluded that the fair value of the petitioners’ shares was $5.75 per share.
The full opinion is available here.