Neal v. Alabama By-Products Corp.

1990 Del. Ch. LEXIS 127

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Text Box: SYNOPSIS Minority shareholders of Alabama By-Products Corporation (“ABC”) sought appraisal of their shares, claiming a $75 per share cash out share price was inadequate. The chancery court valued the minority shareholders’ common stock at $180 on the date of the merger, using the discounted cash flow (DCF) valuation methodology. The court first addresses the parties’ valuation arguments (part III of the opinion) as presented by their expert appraisers. The minority shareholders contended the fair value of their shares was $193.40. Their expert valued ABC using three alternative methods: historical earnings, net asset value, and discounted cash flow—yielding three different values: $166, $205, and $225 per share respectively. The expert then calculated a weighted average of these results: 40% historical earnings, 40% net asset value, 20% DCF. The court summarizes the expert’s conclusions for each of the three methods employed (part III.A.1-3). ABC contended that the fair value of the minority shares was only $64 per share. Its expert used a “hybrid” DCF and net asset methodology. Following the DCF approach, the expert projected future earnings for the following 13 years (a period corresponding to the life of many of ABC’s long-term contracts), calculated a terminal value for the 13th year (applying a multiple to the terminal value to account for earnings beyond the terminal year), and discounted these net cash flows back to their present value using a discount rate “deemed appropriate given market, industry and business conditions.” The expert then adjusted the present value to account for projected declines in the value of assets such as working capital, coal reserves, and land that were integral to ABC’s mining operations. The court adopted ABC’s valuation methodology, but with some adjustments of its own. First, the court analyzed and modified ABC’s asset value adjustments to the net present value amount. Though it agreed in principle with ABC’s methodology, the court varied some of the input assumptions (e.g., the amount of mineable coal reserves, value of a passive partnership interests). This yielded higher asset values. The court then analyzed ABC’s choice of discount rate. Both respondent and petitioner derived their discount rates by using the capital asset pricing model. The court approved of this method. However, the court discovered that ABC’s accountants (Ernst & Young) had used substantially lower discount rates in working papers it had submitted to ABC’s valuation expert. The court felt these lower discounts rates better captured the risk inherent in ABC’s coal mining operation and adopted those rates.