In re Appraisal of Regal: deal-price-less-synergies valuation method is “first among equals”

In March 2017, Cineworld, a large European movie theater business, approached Regal about a potential merger. After months of negotiating, Cineworld and Regal reached a deal for US$23.00 per share, a 46.1 percent premium to the closing price of Regal’s stock on November 1, 2017. The deal included a go-shop provision, a two-tiered termination fee provision, and a fiduciary out. News of the negotiation leaked in late November, which caused Regal’s stock to increase steadily.

Although Regal’s competitor AMC expressed some interest during the go-shop period, it refused to comply with a detailed information request from Regal and did not further engage. None of the other 47 potential buyers expressed interest by the closing of the go-shop period on January 22, 2018. The deal closed on February 28, 2018 for US$23.00 per share. Meanwhile, the Tax Cuts and Jobs Act (Tax Act) was enacted, cutting the corporate tax rate from 35 percent to 21 percent.

In evaluating the fair price of Regal as a going concern, the court selected the “deal price minus synergies” method adjusted for changes in value between signing and closing because the sale process was reliable and arms-length. The indicia of reliability included a third-party buyer, a unconflicted board, price negotiations, the active post-signing market check, and lack of any preclusive deal protection measures. The court found that the single-bidder process did not affect the deal because the post-signing market check was sufficiently open, Regal had good reasons to avoid pre-signing outreach, and because news of the merger leaked before the deal was signed. It also rejected the shareholders’ argument that the board delegated the determination of a fair price to the majority shareholder of Regal because the controlling shareholder had (1) interests that aligned with the stockholders and (2) no idiosyncratic reasons to favor a near-term cash deal.

In reaching a valuation, the court rejected the dissenting stockholder’s DCF model because DCF modeling is inherently subjective and the model itself relied on overly optimistic projections. The court also rejected using the unaffected trading price of Regal’s stock despite the indicia that the trading market for Regal’s stock was informationally efficient, because there was a perceived risk of the controlling shareholder obtaining private benefits of control, certain block sales by the controlling shareholder in 2016 created an overhang, and there was evidence that Regal’s stock was in a trough after a recent bad film slate.

The court then calculated the synergies from the deal to be US$6.99, comprised of (a) operational synergies of US$4.26 per share from Regal’s privatization, eliminating of redundancy, layoffs, and economies of scale on concessions and insurance; and (b) financial savings of US$2.73 per share based on Cineworld’s post-Tax Act estimate of financial structuring benefits. Because the deal price was a 46.1 percent premium over Regal’s unaffected market price, the court found that some of the synergies were included in the deal price. To determine what percentage of synergies to allocate to the shareholders, it then relied on a 2018 study from Boston Consulting Group that estimated an average synergy allocation of 54 percent to the sellers, 46 percent to the buyers; here, US$3.77 per share of the synergies. The court’s calculation resulted in a fair price at the time of signing of US$19.23 per share, or 83 percent of the deal price.

Before reaching a final price, however, the court considered the impact of the Tax Act’s cut of the corporate tax rate, which became effective between signing and closing. Finding the Tax Act increased Regal’s value, the court relied on Cineworld’s disclosures about the financial savings it could achieve before and after the passage of the Tax Act to calculate the figure of US$4.37 per share. Adding this to the US$19.23 deal-price-minus synergies calculation, the court awarded shareholders a price of US$23.60 per share, just over the US$23.00 deal price. While this represented a modest 2.6 percent increase on the deal price, it was far below the 47 percent increase sought by the petitioners.

Authored by Ryan M. Philp, Allison M. Wuertz, and Maura Allen.