Without exaggeration, Skadden Arps, which represented the merger target, Clearwire, and the buyer, Sprint, called it “the biggest appraisal defense victory ever” and “the most dramatic downward departure from a deal price in the court’s history.” Sprint acquired Clearwire at a merger price of $5.00 per share. In the statutory appraisal action that followed, based on competing discounted cash flow (DCF) analyses, Clearwire’s expert valued the company at $2.13, while the stockholder petitioners, affiliates of Aurelius Capital Management, LP, sought $16.08 per share. In ACP Master, Ltd. v. Sprint Corp., C.A. No. 8508, and ACP Master, Ltd. v. Clearwire Corp., C.A. No. 9042 (Del. Ch. July 21, 2017, corrected Aug. 8, 2017), Vice Chancellor J. Travis Laster of the Delaware Court of Chancery rejected the petitioners’ expert’s $16.08 valuation and adopted the company’s $2.13 valuation without adjustments. The petitioners held more than 25 million Clearwire shares and would have received more than $125 million if they had accepted the $5.00 per share merger consideration. Because they rejected the merger price and opted for appraisal, the petitioners are entitled to only $2.13 per share, for a total of approximately $53 million – a loss of more than $70 million. Their time for appeal has not yet expired.
The Court of Chancery rejected Aurelius’ $16.08 valuation because its DCF analysis relied on financial projections developed by Sprint, the buyer, in an effort to raise its offer for Clearwire in response to a competitive bid. The Court found that the Sprint projections were based on a model that was “not a plausible business plan” and that the projections “did not reflect Clearwire’s operative reality on the date of the merger.” By contrast, Clearwire’s DCF analysis relied on the company’s own projections prepared in the ordinary course of business by management with “significant experience preparing long-term financial projections,” and were “regularly updated … to reflect changes to Clearwire’s operative reality.” The only other significant difference between the competing DCF valuations was in perpetuity growth rates. Aurelius’ expert used a “generic” growth rate equal to expected GDP growth, while Clearwire’s expert used a rate at the “the mid-point between inflation and GDP growth.” The Court adopted Clearwire’s perpetuity growth rate, finding that it was “if anything, generous for Clearwire.”
The real difference, however, was “massive” synergies. The Court’s “dramatic” ruling makes sense because synergies resulting from a merger are not included in the Court’s estimation of “fair value.” Under Delaware law, the “appraisal statute requires that the Court exclude any synergies present in the deal price—that is, value arising solely from the deal.” Merion Capital LP v. BMC Software, Inc., 2015 WL 6164771, at *14 (Del. Ch. Oct. 21, 2015). Fair value is based on “the value of the company . . . as a going concern, rather than its value to a third party as an acquisition.” M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999).
The synergies came from the fact that Clearwire was the “largest private holder of wireless spectrum in the United States,” and access to that spectrum was “key” to Sprint’s success. Sprint projected that “spectrum would cost Sprint an average of $3.30 per gigabyte, compared to less than a dollar if Sprint owned the spectrum,” and Sprint paid as much as $6.00 per gigabyte under its existing contract with Clearwire. As a result, Sprint estimated potential synergies at $1.5 billion to $2 billion, or $1.95 to $2.60 per share. Other estimates were as high as $3 billion to $5 billion ($3.90 to $6.50 per share), and Clearwire’s own estimate was more than $3 billion. In light of those projected synergies, the Court of Chancery’s finding that fair value net of synergies was $2.87 below the $5.00 merger price does not seem unreasonable.
James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For more information about the firm, visit hfklaw.com.