Dfc Global Corporation v. Muirfield Value Partners, L.P.

172 A.3d 346 (2017)

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Nature of the Case

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Facts

DFC Global Corporation (D) provides alternative consumer financial services, predominately payday loans. In 2004, its last fiscal year before becoming a public company, D had total revenues of $270.6 million. As of 2013, revenues had risen to $1.12 billion. D's shares were traded on the NASDAQ exchange from 2005 until the merger. D's capital structure was comprised of about $1.1 billion of debt as compared to a $367.4 million equity market capitalization. D faced heightened regulatory scrutiny. The new regulations, particularly in the U.K., were likely to hurt D's U.K. business. When the U.S. Consumer Financial Protection Bureau examined them, it found that 'most payday loans are made to borrowers who renew enough times that they end up paying more in fees than the original loan amount.' D sought to sell the company. In autumn 2013, D attempted to refinance roughly $600 million. The offering was terminated because of insufficient investor interest. D's credit rating was also downgraded from B+ to B. Suitors did make bids, but the price kept falling as D's projections took hits from the new regulatory climate. On April 1, D's board approved a merger with Lone Star at $9.50 per share. D announced the merger and also cut its earnings outlook, reducing 2014 fiscal year adjusted EBITDA projections from $170-200 million to $151-156 million. D was also placed on 'CreditWatch with negative implications.' D failed to meet its deal point projections, and Muirfield (P) instituted a statutory appraisal action to determine the price. Ps' valuation expert determined DFC's value only relying on a discounted cash flow model and used that to come to a fair value of DFC at $17.90 per share, 88% above the $9.50 per share deal price. D's expert used both a discounted cash flow model, which valued D at $7.81 and a comparable companies analysis, which valued Dat $8.07 per share. D weighted each method equally and so came to a fair value of $7.94, although he also argued that the $9.50 per share deal price was a reliable indication of fair value. The Court of Chancery considered the relevance of the deal price and recognized that 'the merger price in an arms-length transaction that was subjected to a robust market check is a strong indication of fair value.' The Court then considered how much weight to give the three fair value inputs it selected. The court found that each of these valuation methods suffers from different limitations that arise out of the same source: the tumultuous environment in the time period leading up to D's sale. It found that D was unable to chart its own course; its fate rested largely in the hands of the multiple regulatory bodies that governed it. Even by the time, the transaction closed in June 2014, D's regulatory circumstances were still fluid. The court found that 'uncertainty impacted D's financial projections' and that under such circumstances a discounted cash flow analysis did not deserve significant emphasis or sole reliance as given in other cases. This same uncertainty in the discounted cash flow analysis was present in the sale process. It held that the uncertainty surrounding D's financial projections also affects the reliability of the multiples-based valuation because this valuation relies on two years of management's projected EBITDA. Despite its doubts, the Court concluded that 'each of them still provides meaningful insight into D's value, and all three of them fall within a reasonable range. The court concluded that the proper valuation was to weight each of these three metrics equally. The Court determined that the fair value of D was: $9.50 (deal price) + $8.07 (comparable companies analysis) + $13.07 discounted cash flow analysis / 3 = $10.21 per share. D moved for reargument because the Court neglected to use the working capital numbers the court had adopted in its opinion in the discounted cash flow model it used to calculate D's fair value. The court corrected the error wherein the discounted cash flow model would yield $7.70 per share-a value similar to its comparable companies analysis-and, using the previous weighting the Court of Chancery adopted, a fair value of $8.42 per share. The Court adopted Ps' expert's suggestion that the correct sustainable growth rate is the midpoint between the average and median sustainable growth rates, i.e., the functions of reinvestment and return on invested capital, underlying the March Projections, 4.0%. This growth rate assumed that, despite the acknowledged risk of insolvency and shrinkage, D would, not only keep pace with the most dynamic mature industries in perpetuity but exceed their growth by a healthy margin, given that 4.0% was fully 27% higher than the risk-free rate of 3.14%. The court adjusted its discounted cash flow model to $13.33 per share, 2% higher than its original and 40% higher than the deal price, which, when given its one-third weight, resulted in a fair value of D at $10.30 per share, $0.09 higher than the post-trial opinion's original award. D and P appealed. D's central argument is that a judicial presumption in favor of the deal price should be established in appraisal cases where the transaction was the product of certain market conditions. D claims the Court of Chancery abused its discretion by only giving one-third weight to the deal price. D argues that the two reasons that the Court gave (1) the fact that D faced increasing regulatory constraints that could not be priced by equity market participants and (2) the fact that the prevailing buyer was a private equity rather than strategic buyer-were not rationally supported by the record. D claims the erred by markedly increasing the perpetuity growth rate it used in its discounted cash flow model after recognizing on reargument that it had used the wrong working capital figures in its original model. Ps argue on cross-appeal that the Court abused its discretion by according weight to a comparable companies analysis, which Ps contend is not a reliable indicator of fair value, and that the court should have given primary, if not exclusive, weight to its discounted cash flow model. D contends that the Court's decision to afford equal weight to the deal price, its discounted cash flow model and its comparable companies analysis was arbitrary and not based on any reasoned explanation of why that weighting was appropriate.