In re: Appraisal of Jarden Corporation

Court of Chancery of Delaware·Decided September 16, 2019·No. CA 12456-VCS·Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

: IN RE: APPRAISAL OF : CONSOLIDATED JARDEN CORPORATION : C.A. No. 12456-VCS :

ORDER

On this 16th day of September, 2019, upon consideration of Petitioners’

Motion for Reargument (the “Motion”) and the Respondent’s Opposition to

Petitioner’s Motion for Reargument (the “Response”), it appears that:

1. On July 19, 2019, the Court issued its post-trial opinion in this appraisal

action (the “Opinion”) in which the Court appraised the fair value of Jarden

Corporation at the time of its merger with Newell Rubbermaid, Inc. at $48.31 per

share. I based that appraisal on Jarden’s Unaffected Market Price (as defined in the

Opinion).1 I also determined that this fair value determination was corroborated by:

(i) other market evidence, including a pre-merger Jarden stock offering at $49.00

per share; (ii) my independent discounted cash flow (“DCF”) analysis, which

yielded a value for Jarden of $48.13 per share; and (iii) to a lesser degree,

Respondent’s merger-price-less-synergies analysis, which yielded a value of $46.21

per share. These valuation measures stood in contrast to Petitioner’s proffered fair

1 In re Appraisal of Jarden Corp., Consol. C.A. No. 12456 (Del. Ch. July 19, 2019) (“Op.”). value of $71.35 per share based on a comparable companies analysis, which I

rejected as incredible for reasons stated in the Opinion.

2. In the Motion, Petitioner’s argue that my DCF analysis does not

corroborate my fair value determination because the DCF results were the product

of certain structural and mathematical flaws. Specifically, Petitioners argue

I miscalculated Jarden’s unlevered free cash flows, miscalculated the weighted

average cost of capital (“WACC”), miscalculated the terminal value and failed to

make proper adjustments for certain tax shields and unfunded

pension/postretirement liabilities. According to Petitioners, correcting for these

errors results in a DCF value for Jarden of between $61.59 and $64.01 per share.

And because this valuation is not corroborative of the Court’s appraisal based on

Jarden’s Unaffected Market Price, Petitioners maintain that the Court must adjust

its appraisal to reflect at least the range indicated by the corrected DCF analysis.

3. “A motion for reargument under Court of Chancery Rule 59(f) will be

denied unless the court has overlooked a controlling decision or principle of law

that would have controlling effect, or the court has misapprehended the law or the

facts so that the outcome of the decision would be different.”2 In the appraisal

context, this court has granted reargument in instances where the court has made

2 Those Certain Underwriters at Lloyd’s, London v. Nat’l Installment Ins. Servs., 2008 WL 2133417, at *1 (Del. Ch. May 21, 2008).

2 structural or mathematical errors in the course of performing its own DCF analysis.3

For reasons explained below, I agree with Petitioners that my DCF analysis must

be corrected as the result of errors made in structuring the DCF model and

calculating the value.4 I disagree, however, that the corrected DCF yields a fair

value in the range of $61.59 and $64.01 per share.

4. Unlevered Free Cash Flows - The calculation of free cash flows in the

Opinion’s DCF model does not add back depreciation or deduct Jarden’s year-over-

year increase in net working capital. Petitioner corrects this error by adding

3 See, e.g., Doft & Co. v. Travelocity.com Inc., 2004 WL 1366994 (Del. Ch. June 10, 2004); Henke v. Trilithic Inc., 2005 WL 3578094 (Del. Ch. Dec. 20, 2005); DFC Global Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017). 4 Ironically, in the Opinion, I cautioned that our courts should not wade “deep into the weeds of economics and corporate finance” without “the guidance of experts trained in these disciplines.” Op. at 2. Yet that is precisely what I did when I endeavored to conduct my own DCF analysis upon concluding that the credible evidence did not support certain aspects of both of the competing experts’ DCF valuations. While I stand by that factual determination, I did not adequately account for the fact that making adjustments to the experts’ DCF models might require that other adjustments be made in order to stay true to the DCF methodology. I made other unforced errors as well. With the assistance of the parties, and their experts’ supplemental affidavits, I have attempted to correct those errors here as best I can acknowledging fully that there must be a “better way to run a railroad.” In view of the fact that the parties’ experts could not agree on any of the significant inputs for the DCF analysis, I am more convinced than ever that the experts’ inability to agree on inputs is evidence that DCF is not reliable here, particularly given the presence of a reliable “market-based metric.” In re Stillwater Mining Co., 2019 WL 3943851, at *61 (Del. Ch. Aug. 21, 2019). The better approach, therefore, would have been to leave it at that rather than “parse through the inputs and hazard semi-informed guesses about which expert’s view was closer to the truth.” Id. Having endeavored, instead, to work through the DCF on my own, I will see that process through to the bitter end by engaging in the revised DCF presented here.

3 depreciation and subtracting the increase in net working capital. I agree that this

adjustment is proper, and reflect the adjustment below:

5. Weighted Average Cost of Capital - The Opinion’s calculation of

WACC incorrectly adjusted for tax twice, by making tax adjustments to the after-

tax cost of debt. Petitioner corrects for this error by omitting this second tax

adjustment from the after-tax cost of debt. I agree that this adjustment is appropriate,

and reflect the adjustment below:

4 I calculate the cost of equity, as I did in the Opinion, by using the capital asset

pricing model (CAPM), which defines the cost of equity as follows:

𝑟𝑒 = 𝑟𝑓 + 𝛽 × (𝑟𝑚 − 𝑟𝑓 ) + 𝑆𝑖𝑧𝑒 𝑃𝑟𝑒𝑚𝑖𝑢𝑚

Where:

rf = Risk-free rate (represented by 10-yr U.S. Treasury bond rate)

β = Predicted equity beta (levered)

(rm − rf)= Equity risk premium

I calculate the after-tax cost of debt by multiplying the pre-tax cost of debt

(4.31%) by (1 - tax rate). To arrive at WACC, I multiply the cost of equity by the

equity to total capitalization, multiply the after-tax cost of debt by the debt to total

capitalization and add these two numbers together.

6. Terminal Value - The terminal value equation cited in the Opinion

conceptually intends to calculate the terminal value in perpetuity based on the year

T+1 unlevered free cash flows, growing at the terminal growth rate and discounting

WACC. Petitioner points out that the Opinion’s DCF Model does not use Terminal

FY21 NOPAT of $1,273 million in its formula to calculate the terminal value.

5 Instead, the Opinion’s DCF Model uses Terminal FY21 unlevered free cash flows

of $939 million.5 Petitioner corrects for this error as follows:

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