In Norcraft, the Delaware Court Offers Further Valuation Guidance

subscribe to case reviews

In Norcraft, the Delaware Court Offers Further Valuation Guidance

subscribe to case reviews

The opinion in Blueblade v. Norcraft marks another instance in which the Delaware Chancery Court exclusively relied on DCF analysis in determining fair value

August 02, 2018

Following on the heels of Dell[1] and DFC[2], the Delaware Court of Chancery, in its decision in Blueblade Capital Opportunities LLC, et al. v. Norcraft Companies, Inc. (“Norcraft”), provided further guidance with respect to the relevant facts and circumstances of considering a merger price.  Vice Chancellor Joseph R. Slights III provided insights into his analysis that led to him applying essentially no weight to the negotiated merger price in determining the fair value of Norcraft’s stock. The case involved the merger of Norcraft, which was engaged in the manufacture and sale of cabinets for new home construction and existing home remodeling markets, with Fortune Brands Home & Security, Inc. (“Fortune”) for the merger price of $25.50 per share in cash. Blueblade and its affiliated parties were Norcraft stockholders on the date of the merger, May 12, 2015.

Vice Chancellor Slights noted the transaction was a result of bilateral negotiations between Norcraft and Fortune, without Norcraft having performed a pre-signing market check. The evidence cited in the opinion indicates that Norcraft’s negotiators intended to rely on the go-shop provisions to enhance their negotiating power. However, the go-shop provisions were undermined by Fortune’s unlimited match rights and by a relatively short, 35-day post-signing go-shop period. This go-shop period effectively was shortened by the commencement of the tender during the period and the tender support agreements that pledged the tender of a majority of Norcraft’s stock prior to the end of the go-shop period. Norcraft’s financial advisor was unable to obtain any offers to acquire Norcraft during the go-shop period. Given the flawed process, Vice Chancellor Slights concluded that the merger price (adjusted for synergies) was not a reliable indication of the fair value.

The opinion also marks another instance in which the court exclusively relied on discounted cash flow (DCF) analysis in determining the fair value in an appraisal action. After determining that the merger price was not a reliable indicator of the fair value, Vice Chancellor Slights, in a nod to the court’s endorsement of the efficient market hypothesis, considered the market trading price. Norcraft had completed its initial public offering (IPO) on November 13, 2013 – giving it a limited historical trading history and having a pre-IPO shareholder base that retained a majority of the outstanding shares – and had limited analyst coverage. Given these circumstances, Vice Chancellor Slights concluded that the publicly traded price was not a reliable indicator of the fair value. Vice Chancellor Slights was not persuaded to rely on either the comparable company analysis or the precedent transaction analysis, leaving the decision essentially entirely reliant on the DCF Analysis.

In addition, Vice Chancellor Slights opined on a few technical items relating to the DCF analysis: one relating to the terminal growth rate and two relating to the calculation of the weighted average cost of capital (WACC). While all of these decisions are subject to analysis of the facts and circumstances of any given situation, the following briefly summarizes the positions in the case:

  • First, the petitioner’s expert opined that the projections should be extended an additional five years to ramp down to a normalized growth rate. Vice Chancellor Slights found the respondent’s expert, who noted that Norcraft operated in a cyclical industry and that extending the projections an additional five years would mark an unreasonable 12 years of growth without a correction, to be more persuasive.
  • Second, Vice Chancellor Slights’ opinion notes, as have other fair value appraisal rights decisions, that the actual observed debt weighting, rather than a target optimal debt weighting, in the capital structure should be relied upon in calculating the WACC in instances in which management did not intend to change the capital structure. 
  • Last, Vice Chancellor Slights concluded that the gross debt balance, rather than the debt balance net of cash, should be used in unlevering the betas of the selected companies.

The experts for the parties were generally in agreement on other key variables in their DCF analyses, including the selections of the perpetuity growth rate (3.5%, excluding the extended projections of the petitioner’s expert), risk free rate of return, equity risk premium, and size premium. Vice Chancellor Slights elected to average the indicated pre-tax debt rates opined on by the experts.

Relying on the result of his DCF analysis, while considering the variance of the result from the merger price as a “reality check,” Vice Chancellor Slights concluded that the fair value of Norcraft’s stock was $26.16 per share. This was a slight premium to the transaction price of $25.50 and also a value that was between the value of $34.78 per share concluded upon by the petitioner’s expert and the value of $21.90 per share concluded upon by the respondent’s expert.

  1. Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1, 22 (Del. 2017)
  2. DFC Global Corp. v. Muirfield Value P 'rs, L.P., 172 A.3d 346, 388 (Del. 2017).