Ramcell, Inc. v. Alltel Corporation d/b/a Verizon Wireless ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
RAMCELL, INC., )
)
Petitioner, )
)
v. ) C.A. No. 2019-0601-PAF
)
ALLTEL CORPORATION d/b/a VERIZON )
WIRELESS, )
)
Respondent. )
MEMORANDUM OPINION
Date Submitted: July 1, 2022
Date Decided: October 31, 2022
Carmella P. Keener, COOCH AND TAYLOR, P.A., Wilmington, Delaware;
Michael A. Pullara, Houston, Texas; Ryan van Steenis, AJAMIE LLP, Houston,
Texas; Attorneys for Petitioner Ramcell, Inc.
Richard L. Renck, Mackenzie M. Wrobel, Tracey E. Timlin, DUANE MORRIS
LLP, Wilmington, Delaware; Attorneys for Respondent Alltel Corporation d/b/a
Verizon Wireless.
FIORAVANTI, Vice Chancellor
This is an appraisal action to determine the fair value of petitioner’s shares of
Jackson Cellular Telephone Co., Inc. (“Jackson”) as of April 4, 2019. On that date,
Alltel Corporation (“Alltel” and d/b/a Verizon Wireless), which owned more than
90% of Jackson’s outstanding common stock, effected a short-form merger under 8
Del. C. § 253. In the merger, petitioner’s stock in Jackson was canceled, and each
share of common stock was converted into the right to receive the merger
consideration of $2,963.
Petitioner Ramcell, Inc. (“Ramcell”) exercised its appraisal rights under 8 Del.
C. § 262, seeking a statutory appraisal for its approximately 155 shares of Jackson
common stock that were cashed out in the merger. Ramcell and Alltel have
presented vastly different valuations of Jackson. Respondent’s expert opines that
Jackson’s per-share value was $5,690.92 at the time of the merger. Petitioner’s
expert has offered two appraisal ranges, opining that, at the high end, Jackson’s per-
share value was $36,016 on the merger date.
Both sides agree that Jackson should be valued exclusively using a discounted
cash flow (“DCF”) approach, but the disparity in the experts’ valuations are
attributed to their sharp disagreements over the inputs to the DCF model and how
they should be calculated. In the end, this court determines that Jackson’s per share
fair value was $11,464.57 as of the valuation date. This number reflects the court’s
determination of Jackson’s fair value taking into consideration all relevant factors.
I. BACKGROUND
The following recitation reflects the facts as the court finds them after trial.1
A. Parties, the Merger, and Procedural History
Respondent Alltel is a Delaware corporation and indirect wholly owned
subsidiary of Verizon Communications, Inc. (“Verizon”).2 On April 9, 2019, Alltel
owned more than 90% of the outstanding common stock of Jackson, a Delaware
corporation.
On April 4, 2019, Alltel’s Board of Directors adopted resolutions approving
a merger of Jackson into Alltel.3 On April 9, 2019, Jackson merged with and into
Alltel, with Alltel surviving the merger.4 Alltel completed the merger pursuant to
Section 253 of the Delaware General Corporation Law (“DGCL”). Immediately
prior to the merger, Jackson canceled and extinguished its outstanding shares of
common stock, converting each share of common stock into the right to receive the
merger consideration of $2,963 in cash, without interest and subject to any
1
Documents filed on the docket for this case are cited as “Dkt.” followed by their docket
number. The trial testimony (Dkt. 124–25) is cited as “Tr.”; deposition testimony is cited
as “[name] Dep.”; trial exhibits are cited as “JX”; and stipulated facts in the pre-trial order
(Dkt. 118) are cited as “PTO,” with each followed by the relevant page, paragraph, or
exhibit number.
2
PTO 2.
3
Id.
4
Id.
2
applicable taxes.5 Ramcell did not consent to the merger, and on May 6, 2019,
Ramcell made a written demand to Alltel for an appraisal of its 155.4309 shares of
Jackson common stock pursuant to 8 Del. C. § 262.6 On August 5, 2019, Ramcell
filed a verified petition for appraisal.
The court conducted a two-day trial on March 2 and 3, 2022. The parties
submitted approximately 260 joint exhibits and five deposition transcripts. There
were four trial witnesses, including valuation experts for each side.7 The Petitioner
presented J. Armand Musey, CFA, JD/MBA (“Musey”), the President of Summit
Ridge Group, LLC, as its valuation expert.8 Respondent’s valuation expert was
Joseph W. Thompson, CFA, ASA (“Thompson”), a principal at the Griffing Group.9
5
PTO 3.
6
Id.
7
The other two trial witnesses were Philip Junker, Verizon’s executive director of business
development, and Courtney Macuszonok Verizon Communications’ manager of FP&A
and commercial finance for Verizon’s consumer group.
8
JX 228, at 67. The Summit Ridge Group, LLC provides business valuation and financial
consulting services in the telecommunications, media, and satellite industries. Musey is a
specialist in the telecommunications industry with extensive experience in the area. Musey
holds a B.A. from the University of Chicago. He additionally holds an M.B.A. and a J.D.
from Northwestern, as well as an M.A. from Columbia University. JX 228, at 8–9.
9
JX 227, at 36. The Griffing Group, LLC is a consulting firm that provides business
valuation, transaction advisory, and litigation support services. Thompson has twenty
years of professional experience in finance and specializes in, among other things, valuing
businesses. Thompson received his B.S. from DePaul University with majors in Finance
and Economics. He went on to earn his master’s in business administration and a master’s
in science and information systems from Boston University. JX 227, at 4.
3
B. Jackson History
In the 1980s, the Federal Communications Commission (“FCC”) used
lotteries to award the rights to construct cellular telephone networks in particular
Metropolitan Statistical Areas (“MSA”).10 The Jackson, Mississippi MSA
(“Jackson MSA”) was one such market.11
A group of investors, including Ramcell, formed Jackson as a partnership to
increase their collective chances of winning the cellular network construction rights
for Jackson, Mississippi.12 The partnership operated such that if one of the partners
won the lottery, the winning partner would contribute its cellular network
construction rights to the partnership in exchange for a 50.01% interest in the
partnership.13 The remaining 49.99% partnership interest would be allocated among
the other partners with no minority partner allowed to have more than a 0.99%
interest in the partnership.14
10
Ramsey Dep. 18:12–19:8; 16:10–23; In re Cellular Tel. P’ship Litig., 2022 WL 698112,
at *3 (Del. Ch. Mar. 9, 2022).
11
Ramsey Dep. 31:16–32:8.
12
Id. at 23:13–22; 31:8–32:8.
13
Id. at 23:13–22.
14
Id.4
In 1986, the FCC awarded the cellular network construction rights for Jackson
MSA to a Jackson partner, and Ramcell received a minority interest of 0.99%.15 In
1988, Jackson converted from a partnership to a corporation.16 By 2009, Alltel was
Jackson’s majority owner. That same year, Verizon acquired Alltel and combined
Jackson’s operations with its own.17 As of early 2018, there were five minority
Jackson stockholders, each with less than a 1% interest in Jackson.18 On April 11,
2018, Alltel offered to purchase the shares of the minority stockholders for $2,870 a
share subject to the condition that all the minority stockholders agree to sell—a
condition that was not met.19 Alltel arrived at the offer price by taking its internal
valuation of Jackson, discounting it by 10% to “create value to Verizon,” and then
discounting it by a further 10% to begin negotiations.20 Alltel made a second offer
to acquire the minority shares, raising the price to $2,963 per share without a
condition that all the minority stockholders sell. Two of the five minority
stockholders accepted the offer and sold their shares to Alltel at that price.21 On
15
Id. at 31:16–32:8; Resp. Pre-Tr. Br. 5.
16
JX 1.
17
JX 73, at 3.
18
JX 7, at 2.
19
JX 115.
20
Tr.I, at 123:16–21 (Junker).
21
JX 154, at 0000013.
5
April 4, 2019, Alltel exercised its right under Section 253 to effect a short-form
merger with Alltel, converting each of Jackson’s remaining shares into the right to
receive $2,963.22 On that same day, Jackson merged with and into Alltel with Alltel
surviving the merger.23
C. Jackson’s Business
Jackson was in the business of providing wireless communication products
and services in the Jackson MSA, which comprises Hinds, Rankin, and Madison
Counties in Mississippi.24 Jackson operated three retail stores, and another four
retail stores were operated by an authorized retailor.25 Jackson also had a network
office and twenty-six employees as of December 31, 2018.26 Verizon operated and
branded Jackson’s operations.27 Jackson derived revenue from four primary
streams: (1) service revenues; (2) visitor roaming; (3) equipment revenue; and (4)
other revenue.
22
Id. at 0000021.
23
Tr.I 109:8–18 (Junker).
24
JX 154, at 0000013.
25
Id.
26
Id.
27
Tr.I 285:6–19 (Macuszonok).
6
Service revenues are revenues generated from customers’ use of the cellular
network.28 In other words, service revenues are the portion of a customer’s phone
bill attributable to service access to Jackson’s network.29 Jackson received both
direct and allocated service revenues.30 Jackson derived direct service revenues that
were attributable to Verizon Wireless customers with a phone number
geographically tied to the Jackson MSA.31 Phone numbers are geographically tied
through their area code and next three digits of the phone number, known in the
industry as NPA/NXX.32 Allocated service revenues are Jackson’s share of service
revenue that derive from customers with non-geographic NPA/NXXs.33 Jackson’s
share is calculated by dividing Jackson’s customers by Verizon Wireless’s total
customers. An example of non-geographic NPA/NXXs are OnStar accounts which
are located in cars.34
Visitor roaming revenue is revenue that Jackson earns from Verizon users
whose NPA/NXX is attributable to a geographic area other than the Jackson MSA
28
Id. at 230:16–23 (Macuszonok).
29
Id.
30
Id. at 230:16–231:7 (Macuszonok).
31
Id. at 231:2–232:3 (Macuszonok).
32
Id.
33
Id.
34
Id.
7
when they are using their device in the Jackson MSA.35 For example, any voice or
data usage by a customer whose NPA/NXX is mapped to New York City while in
Jackson would generate roaming revenue attributable to Jackson.
Equipment revenue is revenue generated from the sale of devices such as
cellphones, machine-to-machine devices, watches, tablets, and accessories. Jackson
would book equipment revenue based on the shipping address for any online orders
or based on the location of the retail store in which the sale occurred.36 Jackson also
received allocated equipment revenue in certain circumstances where an equipment-
based promotion, such as a buy-one-get-one-free promotion, would not provide
economic benefits to a legal entity. Such promotions are often loss leaders to drive
subscriber growth. In situations where the equipment promotion is given by one
legal entity, but the subscriber receives an NPA/NXX that allocates their subscriber
revenue to another legal entity, the promotion is allocated across legal entities to
make sure that the promotion is equitable to all of Verizon’s legal entities.37
“Other revenue” comprises revenue generated that is not necessarily
connected to the Verizon network.38 For example, handset insurance and IT support
35
Id. at 237:10–13 (Macuszonok).
36
Tr.I 24:15–21 (Musey).
37
Id. at 242:7–23 (Macuszonok).
38
Id. at 244:6–9 (Macuszonok).
8
service revenue are categorized as other revenue.39 Jackson also generates non-
operating income, or losses depending on the year, from investments.40
Jackson’s operating expenses fall into six categories: (1) cost of service; (2)
cost of roaming; (3) cost of equipment; (4) depreciation and amortization; (5)
commissions; and (6) selling, general, and administration.41
Cost of service expenses are those incurred to run the network. The expenses
are Jackson-specific costs of service and allocated costs of service.42 Jackson-
specific cost of service includes the cost of fiber to connect two cell sites that are
both located within Jackson.43 An example of allocated costs of service is the cost
of fiber that connects a cell site in Jackson to a site owned by another legal entity.44
Cost of roaming is the cost created when a Jackson NPA/NXX designated
customer uses their device in an area serviced by another legal entity.45 For example,
39
Id. at 244:6–14 (Macuszonok).
40
Id. at 244:18–20 (Macuszonok).
41
JX 190.
42
Tr.I 236:16–24 (Macuszonok).
43
Id.
44
Id. at 237:2–6 (Macuszonok).
45
Id. at 238:4–9 (Macuszonok).
9
a Jackson customer who uses their phone in Los Angeles would create roaming
expenses for the use of their device attributable to Jackson.46
Cost of equipment expenses are the costs of sold inventory.47 For example,
when Jackson sells an iPhone that it purchased from Apple, Jackson incurs cost of
equipment expense.48 For the expense to be allocated to Jackson, the sale must occur
in a Jackson retail store or go to a shipping address located in the Jackson MSA.49
Depreciation and amortization expenses comprise the expense related to the
assets that Jackson holds.50 For example, a cell site typically has a useful life of
seven years. The expense required to purchase or construct a cell site is capitalized
up front and then depreciated over those seven years.
Commissions are expenses related to the sale of devices from retail store
employees or indirect agents.51
Selling, general, and administrative expenses is a catch-all expense category
that, in large part, consists of allocated costs from Verizon.52 For example, the
46
Id.
47
Id. at 243:18–21 (Macuszonok).
48
Id. at 244:1–2 (Macuszonok).
49
Id.
50
Id. at 245:1–6 (Macuszonok).
51
Id. at 245:8–10 (Macuszonok).
52
Id. at 245:11–21 (Macuszonok).
10
salaries of Verizon’s in-house accountants are included in this catch-all category on
an allocated basis.53
D. Jackson’s Financing
When Jackson was organized as a partnership, Jackson financed its capital
expenditures through capital calls.54 After Jackson became a corporation, Jackson’s
majority owner financed capital expenditures through intracompany debt recorded
as a Due to Affiliate (“DTA”) balance.55 The DTA balance effectively operated as
a cash account that recorded inflows and outflows.56 A positive net income would
reduce the DTA balance, while things like capital expenditures would increase the
balance.57 Until the DTA balance was extinguished, it was “not mathematically
possible to pay dividends” to Jackson’s equity holders.58
Data on the DTA is not available for periods predating 2005, and existing
records do not explain the origin of the DTA balance.59 The DTA balance centered
on a mean of $44.6 million from 2005 to 2010 with variations of up to $4 million
53
Id.
54
Ramsey Dep. 34:17–21; 37:5–7.
55
Junker Dep. 89:6–87:12.
56
Tr.I 247:1–5 (Macuszonok).
57
Id.
58
Tr.I 117:15–19 (Junker).
59
JX 159A.
11
around that mean throughout the period.60 In 2011, the DTA balance jumped from
$48.6 million to $81.6 million, an increase of $33 million.61 A portion of this
increase, $18.4 million, can be attributed to a sale of assets from Verizon to Jackson
as a part of Jackson’s 4G network development and consolidation of overlapping
assets in the Jackson area.62 The parties and their experts did not explain the
remaining $14.6 million dollar jump at trial, in their expert reports, or in any of the
briefing. Starting in 2013, earnings before interest, taxes, depreciation, and
amortization (“EBITDA”) began to decrease the DTA balance. By 2018, positive
EBITDA results had decreased the DTA amount to $12.8 million.63
Verizon apparently charged Jackson an interest rate for its DTA funds, but the
rate was not established by the parties at trial.64 Respondent’s expert, Thompson,
asserts that the DTA balance accrued interest at the applicable federal funds rate.65
Petitioner’s expert, Musey, states that his analysis suggests that Verizon was
charging Jackson an interest rate of 5.3%.
60
Id.
61
Id.
62
Tr.I 249:12–250:22 (Macuszonok).
63
JX 159A.
64
Tr.I 134:11–15 (Junker).
65
JX 227, at 36.
12
E. EDGE Receivables
Important to this appraisal proceeding is Jackson’s practice of selling phones,
financing them, and securitizing the receivables. In the past, Verizon would give
customers their phones for free.66 Around the valuation date, Verizon had begun to
sell customers their phones and finance them so that they would pay off the cost of
the phone over the course of two years.67 Thompson states that these receivables are
securitized through a third-party financier and are therefore a cash-neutral event
outside of their associated financing expense.68
F. United States, Jackson MSA, and Wireless Industry Market Outlook
Despite the same available information, Thompson and Musey came to
different conclusions regarding the overall United States’ economic outlook, the
Jackson MSA’s market outlook, and the wireless industry’s market outlook.
Thompson, relying on the Congressional Budget Office’s economic forecasts
published in January 2019, painted a picture of the overall United States economy
generally headed for a slight slowdown in the wake of Trump-era economic and tax
policies which created short-term, outsized economic growth.69 Thompson’s
66
Tr.II 341:16–18 (Thompson).
67
Id.
68
JX 227, at 33.
69
Id. at 19.
13
proffered forecast predicted that real GDP was to grow by 2.3% in 2019 and an
average of 1.7% per year from 2020 through 2023.70 Musey relied on the outsized
GDP growth in 2018, Trump administration tax policies, low cost of debt, favorable
regulatory environment, and positive statements about the United States economy
from Verizon executives to paint a favorable picture of the macro environment
poised for continued growth.71
Thompson presented a somewhat gloomy view of Jackson MSA’s economic
outlook considering, population and income trends. Looking at U.S. Census Annual
Population Estimates, Thompson found that the Jackson MSA experienced flat to
modest population growth from 2013 to 2018.72 Thompson further found that Hinds
County, Jackson MSA’s largest county, saw a decrease in population of 3.4%
between 2010 and 2018.73
Musey rebuts Thompson’s view as overly pessimistic. Musey found that the
population growth of the Jackson MSA was -0.19%, +0.03%, and 0.14% for the one-
year, three-year, and five-year trailing periods ended December 31, 2018.74 This
70
Id.
71
JX 228, at 22–23.
72
JX 227, at 20.
73
Id. at 21.
74
JX 228, at 24.
14
population growth is slower than the national average population growth for these
periods of 0.80%, 0.71%, and 0.74%.75 Musey, however, points to older U.S. Census
data to show that the population of Jackson MSA increased by 9.4% between 2000
and 2010.76 Musey claims that the older data is more reliable and is a better indicator
of demographic trends, despite being almost a decade out of date.77 Income data for
the Jackson MSA presented by Thompson shows that Madison and Rankin County
have a higher median household income than the United States average, while Hinds
County substantially trails the United States average.78
Thompson and Musey also disagree about the wireless industry’s economic
outlook. Thompson states that the wireless market is highly competitive and that
companies have limited options to differentiate their products, which has led to
decreasing revenues in the industry overall.79 Additionally, Thompson states that
industry forecasts expect the average revenue per user (“ARPU”) to continue to
decline, which will stifle revenue growth opportunities.80 Musey agrees that industry
75
Id.
76
JX 229, at 47.
77
Id.
78
JX 227, at 22.
79
Id. at 24.
80
Tr.I 19:20–24 (Musey). The ARPU is calculated by dividing total revenue by the average
number of subscribers during a period.
15
revenues and ARPU decreased between 2013 and 2018.81 Declining ARPU is in
part driven by an increase in non-traditional subscribers (i.e., non-cellphone
subscribers), which increase the subscriber count without a commensurate increase
in revenue.82 Musey, however, expects future revenue growth in the industry of
3.1% because of the revenue opportunities attendant to the 5G rollout.83
5G is the fifth generation of the wireless mobile network. Since the 1980s,
“[t]telecommunication providers and technology companies around the world have
been working together to research and develop new technology solutions to meet
growing demands for mobile data from consumers and industrial users.”84 The 5G
network is the latest iteration of this effort. The 5G rollout has the potential to create
new revenue opportunities for wireless firms because of the various new applications
and services it enables.85
5G has very low latencies, which allows users to create of Internet of Things
(“IoT”) applications.86 Latency is the time it takes a piece of data to go from its
81
JX 228, at 27.
82
Tr.II, at 444:4–7 (Thompson).
83
Id. at 28.
84
JILL C. GALLAGHER & MICHAEL E. DEVINE, CONG. RSCH. SRV., R45485, FIFTH-
GENERATION (5G) TELECOMMUNICATIONS TECHNOLOGIES: ISSUES FOR CONGRESS 1 (Jan.
30, 3019).
85
Tr.I, at 20:30–21:20 (Musey).
86
Id.
16
origin to its destination.87 The IoT is a “network of physical objects—‘things’—that
are embedded with sensors, software, and other technologies for the purpose of
connecting and exchanging data with other devices and systems over the internet.”88
As more IoT systems come online because of the 5G rollout, the more revenue
opportunities there are for firms like Verizon which provide 5G wireless services.
5G also allows for an enormous amount of bandwidth.89 Bandwidth is a
network’s capacity to handle data. The greater a network’s bandwidth, the more
data can be accessed over that network at any given time.90 With 5G and the colossal
amount of bandwidth it provides, the wireless industry is poised to move into the
fixed internet business.91 This means that companies like Verizon could compete
with companies that provide internet through cable modems. This opens an avenue
of growth for the wireless industry because the wireless industry is now able to
effectively provide internet to consumers.92
87
Id.
88
What is IoT, ORACLE, https://www.oracle.com/internet-of-things/what-is-iot (last visited
Oct. 20, 2022).
89
Tr.I, at 20:30–21:20 (Musey).
90
GALLAGHER & DEVINE, supra note 84, at 5.
91
Id.
92
Id.
17
At trial, however, Musey stated that during the 4G cycle, industry revenues
did not peak as anticipated.93 Thus, it is possible that the 5G network will not provide
all the revenue benefits it promises.
G. Competitive Environment – C-Spire
The nature of Jackson’s competitive environment is another area in which
Thompson’s and Musey’s opinions diverge. Thompson states that Jackson’s future
growth is hampered by the presence of a regional competitor, C-Spire.94 Musey uses
the Herfindahl-Hirschman Index (“HHI”) to discount any effect C-Spire may have
had on the competitive environment and to claim that the Jackson MSA is not
significantly different from the national market.95 The HHI is used to measure
market concentration in competition analyses and is calculated by summing the
squared market shares of all firms in any given market.96 In 2013, the HHI for the
Jackson MSA market was 3,016, slightly lower than the national average HHI for
the wireless industry of 3,027 during the same time period.97 Musey states that this
is an indication of an average level of competition compared to the U.S. as a whole.98
93
Tr.I 86:17–24 (Musey).
94
JX 227 at 25.
95
JX 228, at 25–26.
96
Id.
97
Id.
98
Id.
18
At trial, Musey further stated that Jackson’s HHI index indicates that C-Spire was
not significantly reducing the market share of Jackson’s other four major
competitors because if it was, the HHI index for the region would be lower than the
national average.99 Thompson contested the use of the HHI index to prove that C-
Spire was not a significant competitor.100 Thompson supported his position that C-
Spire was in fact a major competitor in the region with anecdotal evidence, including
that C-Spire has over a million subscribers, that 94% of C-Spires’s stores are located
in Mississippi, that C-Spire employed 1,500 people, and that readers of the
Mississippi Business Journal voted C-Spire’s mobile communications unit the best
in Mississippi noting C-Spire’s impact in moving Mississippi forward.101
99
Tr.I 16:9–15 (Musey).
100
The HHI is calculated by taking the sum of the squares of the market participants.
HHI=S1^2+S2^2 . . . . Sn^2. If in one market there are two participants (e.g., Verizon and
AT&T) and they control the market 60/40, the HHI would be 5200. If in another market
there were two competitors (e.g., Verizon and C-Spire), and they control the market 60/40,
the HHI would be 5200. Thus, the HHI in aggregate only informs the relative
concentration, not which firms are creating the concentration. As a result, in the Jackson
market, it is possible that C-Spire is a significant competitor and that one of the other
competitors in the market is not active or is not taking up a significant amount of market
share.
101
JX 230, at 8–11; Tr:II, 370:17–371:20 (Thompson).
19
H. Keeping Track of Subscribers: NPA-NXX & Principal Place of Use
1. NPA-NXX
As previewed above and as discussed thoroughly in the court’s recent In re
Cellular Telephone Partnership Litigation (“In re Cellular”) decision,102 keeping
track of the number of subscribers attributable to a regional wireless provider is
difficult due to the NPA-NXX system and a lack of viable alternatives. As Vice
Chancellor Laster outlined in In re Cellular, “From the early days of the cellular
industry until the mid-2000s, wireless carriers pursued a relatively stable business
model that depended on ‘postpaid’ wireless voice plans. Postpaid subscribers
entered into long-term contracts (typically one or two years) and paid fees based on
their monthly usage.”103 The court further describes the way in which subscribers
were tracked:
Wireless carriers tracked subscribers and their usage using a system
known as “NPA-NXX,” a shorthand term for the area code and next
three digits of the subscriber's phone number. For example, in the
phone number (999)-555-1234, the NPA-NXX is 999-555. The last
four digits produce a block of 10,000 phone numbers, ranging from
0000 to 9999, associated with that particular NPA-NXX.104
102
2022 WL 698112, at *3–5 (Del. Ch. Mar. 9, 2022).
103
Id. at *4.
104
Id.
20
The FCC assigned NPA-NXX to geographic regions throughout
Verizon’s United States territories.105 Jackson has a specific set of NPA-NXX
numbers that are assigned to it, and any customers whose NPA-NXX were
assigned to the Jackson area were identified as Jackson subscribers for the
purposes of allocating revenue.106
Verizon employees typically gave customers NPA-NXXs based on
where the person lived or used their phone the most.107 Verizon employees,
however, had a fair bit of discretion in assigning NPA-NXXs, so there is a
possibility for error in that customers could be assigned to the incorrect NPA-
NXX.108
The NPA-NXX system does not properly allocate service revenues if a
customer moves and does not change their phone number, because wireless
companies have “no mechanism for assigning the existing NPA-NXX number
to the new market.”109 The revenues associated with a customer who moved
105
Tr.I 216:20–24 (Macuszonok).
106
Id. at 216:12–217:8 (Macuszonok).
107
Tr.I 23:1–26:8 (Musey).
108
Id.
109
In re Cellular, 2022 WL 698112, at *4.
21
but did not change their number “continued to be attributed to the original
market.”110 As described in In re Cellular:
Until the mid-aughts, [this] major defect was not a significant problem
. . . . During that era, if a subscriber used her cellular phone outside of
her local market, then the carrier charged the subscriber for “roaming.”
Due to the high cost of roaming, a customer who relocated outside of
her home area had a strong financial incentive to obtain a new NPA-
NXX number. Moreover, until the advent of number portability in
2004, any subscriber who changed carriers was treated as a new
subscriber and received a new NPA-NXX number. A customer’s NPA-
NXX number therefore correlated strongly with the customer’s primary
place of use, and customers holding NPA-NXX numbers associated
with the Partnership were highly likely to be primarily using the
Partnership's portion of [the] network.111
With the advent of number portability and nationwide rate plans in the mid-
aughts, the NPA-NXX became a less reliable means of keeping track of the number
of subscribers attributable to a regional partnership within a larger wireless service
business. Number portability is a feature that permits a customer disconnecting
service from one wireless provider to take that number with them to their next
wireless provider.112 Nationwide rate plans offered customers who formerly paid
roaming charges when traveling between markets the ability to make calls or use
data without incurring roaming charges.113 As a result of the developments in the
110
Id.111
Id.112
Tr:I 172:1–4 (Junker).
113
Tr.I 173:23–3 (Junker).
22
wireless industry, customers no longer had an incentive to change phone numbers
when moving out of one NPA-NXX region and into another.114 As cell users
inevitably moved from one NPA-NXX region to another, the NPA-NXX system
became increasingly unreliable and is no longer likely to be a close proxy for the
number of subscribers in a given NPA-NXX region.115 A wireless service provider
can clean up this data by allocating customers who create a large amount of
internally calculated roaming charges to the NPA-NXX region in which they are
creating the roaming charges.116 Verizon, however, does not appear to have
undertaken this effort.117
2. Principal Place of Use
A suggested alternative means of calculating the number of Jackson
subscribers is by using the customers’ principal place of use (“PPU”). PPU is
generally defined as where the customer uses the connected devices most often.118
A customer’s billing address is used as a proxy that customer’s PPU.119
114
Tr.I 26:17–27:2 (Musey).
115
Id. at 25:2–28:2 (Musey).
116
Id. at 30:13–24 (Musey).
117
Id.118
Tr.I 182:8–12 (Junker).
119
Tr.I 28:23–29:1 (Musey).
23
PPU is not a completely accurate way to measure the number of subscribers
in a given region. Some customers may have their billing address in one region and
use their phone exclusively in another region.120 Further, large swings in PPU can
occur if an enterprise customer changes its billing address. For example, in Jackson,
it appears that a single enterprise customer, Itron, updated its billing address in 2017
causing 200,000 connected devices to be reallocated from Jackson to another legal
entity.121
Neither Musey nor Thompson used PPU as a basis for their revenue
projections.
3. NPA-NXX v. PPU
The below chart compares the number of Jackson subscriber lines measured
by NPA-NXX with Jackson’s subscriber lines measured by principal place of use:122
Date NPA-NXX PPU
4/1/2012 21,117 20,565
4/1/2013 35,096 61,764
4/1/2014 57,008 301,607
4/1/2015 72,047 314,754
120
Tr.I 29:2–4 (Musey).
121
Tr.I 219:21–220:1 (Macuszonok).
122
JX 223 at 22.
24
4/1/2016 82,409 323,003
4/1/2017 82,733 318,879
4/1/2018 84,699 100,048
4/1/2019 90,787 101,529
The data show that the number of subscribers according to PPU moved
dramatically in 2014 and after 2017. Alltel attributes this to Itron’s change in billing
address.123 Petitioner does not dispute this.
I. Historical Financials & Management Projections
Verizon’s partnership accounting group (“PAG”) created annual financial
statements for Jackson in the ordinary course, but did not create projections for
Jackson in the ordinary course.124 The PAG creates these annual financials to reflect
the revenues, expenses, and capital investment that arise from the partnership’s
particular market.125 Jackson’s financial statements were unaudited because
Jackson’s corporate bylaws did not contain a requirement that its financial
statements be audited.126 In preparing to effect the merger, Verizon created a ten-
123
Tr.I 219:21–220:1 (Macuszonok).
124
Tr.I 131:8–14 (Junker).
125
Id.126
Macuszonok Dep. 177:3-18.
25
year forecast of Jackson’s financial performance to establish the merger price.127
Verizon created the forecasts knowing that a merger was imminent and that appraisal
litigation was possible, if not likely.128
II. ANALYSIS
The purpose of an appraisal proceeding is to give stockholders dissenting from
a merger the opportunity to receive a judicially determined fair value for their shares
of the company.129 In an appraisal proceeding, 8 Del. C. § 262(h), directs the court
to:
[A]ppraise the shares determining their fair value, exclusive of any
element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors.130
The fair value that the court is to determine in the appraisal context is largely
a judge-made creation “freighted with policy considerations” and should not be
conflated with the general economic concept of fair value.131 In explaining the
127
JX-152A, Alltel_00012529-30.
128
Id. at Alltel_0012523.
129
Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1186 (Del. 1988) (hereinafter “Cede
I”).
130
8 Del. C. § 262(h).
131
Finkelstein v. Liberty Digit., Inc., 2005 WL 1074364, at *11 (Del. Ch. Apr. 25, 2005).
26
contours of fair value more than seventy years ago, the Delaware Supreme Court
observed:
The basic concept of value under the appraisal statute is that the
stockholder is entitled to be paid for that which has been taken from
him, his proportionate interest in a going concern. By value of the
stockholder’s proportionate interest in the corporate enterprise is
meant the true or intrinsic value of his stock which has been taken by
the merger. In determining what figure represents this true or intrinsic
value, . . . the courts must take into consideration all factors and
elements which reasonably might enter into the fixing of value. Thus,
market value, asset value, dividends, earning prospects, the nature of
the enterprise and any other facts which were known or which could
be ascertained as of the date of the merger and which throw any light
on future prospects of the merged corporation are not only pertinent to
an inquiry as to the value of the dissenting stockholder’s interest, but
must be considered . . . .132
The burden of proof in an appraisal proceeding as to the issue of fair value
differs from a typical civil proceeding. “In a statutory appraisal proceeding, both
sides have the burden of proving their respective valuation positions by a
preponderance of the evidence.”133 In evaluating the parties’ positions, “[n]o
presumption, favorable or unfavorable, attaches to either side’s valuation,”134 and
“[e]ach party also bears the burden of proving the constituent elements of its
valuation position . . . including the propriety of a particular method, modification,
132
Tri-Cont’l Corp. v. Battye, 74 A.2d 71 (Del. 1950).
133
M.G. Bancorporation v. Le Beau, 737 A.2d 513, 520 (Del. 1999).
134
Pinson v. Campbell-Taggart, Inc., 1989 WL 17438, at *6 (Del. Ch. Feb. 28, 1989).
27
discount, or premium.”135 If neither party can meet the preponderance standard on
the “ultimate question of fair value, the court is required to make its own
determination.”136
In making its determination, the court must value the company as a “going
concern based upon the ‘operative reality’ of the company as of the time of the
merger.”137 The company must be valued as a stand-alone going concern because
the assumption that underlies an appraisal valuation is that the stockholders who
elect appraisal would maintain their investment position in the corporation had the
merger not occurred.138 The valuation date is the date on which the merger closes.139
Delaware courts and valuation experts recognize that valuation is an art rather
than a science.140 Thus, it is unlikely that the court will be able to uncover the true
fair value of the company at the time of the merger; its form can only be
135
Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in Mergers and
Consolidations, Corp. Prac. Portfolio Series, No. 38-5th, at VI.K (2022) [hereinafter
Finkelstein & Hendershot] (describing the burden of proof in a Delaware appraisal
proceeding).
136
Id.137
M.G. Bancorporation, 737 A.2d at 525.
138
Paskill Corp. v. Alcoma Corp., 747 A.2d 549, 553 (Del. 2000).
139
Cede I, 542 A.2d at 1186.
140
See, e.g., In re Shell Oil Co., 607 A.2d 1213, 1221 (Del. 1992) (“Valuation is an art
rather than a science.”); In re Smurfit–Stone Container Corp. S’holder Litig., 2011 WL
2028076, at *24 (Del. Ch. May 20, 2011) (“[U]ltimately, valuation is an art and not a
science.”)
28
approximated through analyzing the shadows cast by the parties’ evidence. Further,
Delaware courts have stated that there is no one fair value and that an impression of
exactitude in appraisal proceedings is unwarranted:
[I]t is one of the conceits of our law that we purport to declare
something as elusive as the fair value of an entity on a given date . . . .
[V]aluation decisions are impossible to make with anything
approaching complete confidence. Valuing an entity is a difficult
intellectual exercise, especially when business and financial experts are
able to organize data in support of wildly divergent valuations for the
same entity. For a judge who is not an expert in corporate finance, one
can do little more than try to detect gross distortions in the experts’
opinions. This effort should, therefore, not be understood, as a matter
of intellectual honesty, as resulting in the fair value of a corporation on
a given date. The value of a corporation is not a point on a line, but a
range of reasonable values, and the judge’s task is to assign one
particular value within this range as the most reasonable value in light
of all the relevant evidence and based on considerations of fairness.141
In determining the range of reasonable values and selecting the appropriate
valuation within that range, the court “has the discretion to select one of the parties’
valuation models as its general framework or to fashion its own.”142 The court may
adopt a party’s model in its entirety.143 The court may also accept a model and then
adjust it by adapting or blending the parties’ factual assumptions.144 If no party
141
Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *2 (Del. Ch. Dec. 31, 2003),
(revised July 9, 2004), aff’d in part, rev’d in part on other grounds, 884 A.2d 26 (Del.
2005) (hereinafter “Cede III”).
142
M.G. Bancorporation, 737 A.2d at 525.
143
Id.144
Id.29
establishes a value that is persuasive, “the court must make a determination based
upon its own analysis.”145 Further, a valuation approach that “may have met ‘the
approval of this court on prior occasions . . . may be rejected in a later case if not
presented persuasively or if ‘the relevant professional community has . . . come, by
a healthy weight of reasoned opinion, to believe that a different practice should
become the norm . . . .’”146
The parties’ experts agree that the best approach to value Jackson is a
discounted cash flow analysis (“DCF”). Thompson and Musey eschewed the
capitalized earnings method, several market approaches, and the asset approach.147
Each of them, for reasons including a lack of comparable companies, determined
that methods other than the DCF method were inappropriate for valuing Jackson.148
Despite selecting the same overarching methodology, the parties’ experts
unsurprisingly came to vastly divergent opinions as to Jackson’s value. Thompson
concluded the fair value for Jackson was $5,690.92 per share.149 Musey conducted
a two-scenario analysis. Scenario One assumed that Jackson’s market penetration
145
Cooper v. Pabst Brewing Co., 1993 WL 208763, at *8 (Del. Ch. June 8, 1993).
146
In re Appraisal of Stillwater Mining Co., 2019 WL 3943851, at *20 (Del. Ch. Aug. 21,
2019) (quoting Glob. GT LP v. Golden Telecom, Inc., 993 A.2d 497, 517 (Del. Ch. 2010)).
147
JX 227, at 39–42; JX 228, at 74–77.
148
JX 227, at 39–42; JX 228, at 74–77.
149
Tr.II 358:23 (Thompson).
30
rates would trend towards Verizon Wireless’s national rates and concluded that
Jackson’s per share fair value was between $21,047 and $30,813.150 Scenario Two
assumed that Jackson’s market penetration rates were already at Verizon Wireless’s
national rates and that they would grow in line with Verizon Wireless’s national
forecasts. Scenario Two concluded that Jackson’s per share fair value was between
$28,856 and $36,016.151
A. The DCF Methodology
A DCF model analyzes the value of a company as “equal to the present value
of its projected future cash flows.”152 Delaware courts have accepted the DCF
methodology, stating that “[w]hile the particular assumptions underlying its
application may always be challenged in any particular case, the validity of [the
DCF] technique qua valuation methodology is no longer open to question.”153 The
DCF methodology is a generally accepted technique that “gives life to the finance
principle that firms should be valued based on the expected value of their future cash
flows, discounted to present value in a manner that accounts for risk.”154 The DCF
model entails three basic components:
150
Tr.I 49:23–50:1 (Musey).
151
Id.152
Neal v. Ala. By-Prods. Corp., 1990 WL 109243 at *7 (Del. Ch. Aug. 1, 1990).
153
Pinson v. Campbell-Taggart, Inc., 1989 WL 17438, at *6 (Del. Ch. Feb. 28, 1989).
154
Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640, at *9 (Del. Ch. Aug. 19, 2005).
31
[A]n estimation of net cash flows that the firm will generate and when,
over some period; a terminal or residual value equal to the future value,
as of the end of the projection period, of the firm’s cash flows beyond
the projection period; and finally[,] a cost of capital with which to
discount to a present value both the projected net cash flows and the
estimated terminal or residual value.155
B. The Estimate of Future Cash Flows
The foundation of a DCF analysis is an accurate estimate of future operating
cash flows over the projection period. This foundation is the most important input
necessary for performing a proper DCF because “[w]ithout a reliable estimate of
cash flows, a DCF analysis is simply a guess.”156 Stated more colorfully, “[g]arbage
in, garbage out.”157
Delaware courts prefer DCF models based on projections prepared by
management in the ordinary course of business because an “unbiased management
forecast ordinarily [is] more reliable than estimates later produced by experts who
cannot be expected to be as familiar with the company as the company’s own
management.”158 Projections prepared by management “are not entitled to the same
deference usually afforded to contemporaneously prepared management
155
Cede & Co. v. Technicolor, Inc., 1990 WL 161084, at *7 (Del. Ch. Oct. 19, 1990)
(hereinafter “Cede II”).
156
Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 312–13 (Del. Ch.
2006).
157
In re PetSmart, Inc., 2017 WL 2303599, at *22 (Del. Ch. May 26, 2017).
158
Cede II., 1990 WL 161084, at *15.
32
projections” where “management had never prepared projections beyond the current
fiscal year,” “the possibility of litigation, such as an appraisal proceeding, was
likely,” and the projections “were made outside of the ordinary course of
business.”159 On the other hand, there is no “bright-line test under which
management projections that were created during the merger process are deemed
inherently unreliable.”160 In fact, Delaware courts have relied on projections
prepared by management outside the ordinary course of business and where the
possibility of litigation loomed in the background.161 The court, however, is
inherently doubtful of post-merger, litigation-driven forecasts because “[t]he
possibility of hindsight and other cognitive distortions seems untenably high.”162
159
Gearreald v. Just Care, Inc., 2012 WL 1569818, at *5 (Del. Ch. Apr. 30, 2012).
160
Merion Cap., L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at *11 (Del. Ch. July 8, 2013).
161
See, e.g., Gilbert v. MPM Enters., Inc., 709 A.2d 663, 669–70 (Del. Ch. 1997)
(accepting management’s financial forecasts created in anticipation of the merger with
minor changes because “management was in the best position to forecast [the company’s]
future before the merger” and rejecting petitioner’s implication that the upcoming merger
led management to understate the company’s future financial performance in the absence
of evidence of a deliberate attempt to falsify the company’s projected financial metrics),
aff’d, 731 A.2d 790 (Del. 1999); Gray v. Cytokine Pharmasciences, Inc., 2002 WL 853549,
at *4–5, *8 (Del. Ch. Apr. 25, 2002) (disregarding “litigation-driven projections” prepared
by petitioner’s expert and accepting projections prepared by management while an offer
was pending and the company was exploring merger opportunities).
162
Agranoff v. Miller, 791 A.2d 880, 892 (Del. Ch. 2001).
33
Moreover, the court “holds a healthy skepticism for post-merger adjustments to
management projections or the creation of new projections entirely.”163
Here, the financial projections on which Thompson relies were created by
management in anticipation of a merger using historical records kept in the ordinary
course. Management knew that appraisal litigation was possible if not probable.
Musey’s projections were created post merger, for the purposes of this litigation.
1. Musey’s Approach
Musey rejected Jackson’s historical financials as being too poor to accurately
forecast future financial results. Instead, he created forecasts for Jackson that
assumed Jackson’s market performance is on par with Verizon Wireless’ overall
national performance.
Musey opined that Jackson’s historical financials could not be relied on for
several reasons. Among others, certain key metrics such as market penetration
deviated from Verizon Wireless’s national rate without satisfactory explanation, the
historical financials relied on NPA-NXX to calculate service revenue, and there were
unexplained jumps in financial metrics such as revenues and the DTA balance.164
Musey rejected Jackson’s historical financials as a predicter of future growth rates,
163
Cede & Co. v. JRC Acquisition Corp., 2004 WL 286963, at *2 (Del. Ch. Feb. 10, 2004)
(hereinafter “Cede IV”).
164
JX 228, at 91–96.
34
in favor of his own financial projections. Musey created two sets of projections,
each of which assumes that Jackson’s performance should be on par with Verizon
Wireless as a whole.165
The first scenario assumes that Jackson’s reported number of subscribers
based on NPA-NXX is correct, but that those numbers would converge with Verizon
Wireless’s nationwide metrics over the forecasted period until 2028.166 Scenario
One assumes that Jackson’s market penetration rates during the forecast period will
trend from Jackson’s market penetration rate in 2018 to 95% of the forecasted
penetration rate for Verizon in 2027 and 2028.167 Musey then adjusted these
forecasted 2027 and 2028 rates down by 1.7% to account for competition from C-
Spire.168 Scenario One assumes that Jackson’s share of the subscribers in the
Jackson MSA would increase from 14% to approximately 47% over the ten-year
DCF projection period. Musey made several other assumptions for his Scenario
One. Musey assumed that roaming revenue and expense would net to zero and that
Jackson’s operating margin would converge to Verizon Wireless’s operating margin
165
Id. at 81–87.
166
Tr. 44:2-16 (Musey).
167
Id.168
Id. Musey calculated the 1.7% number by taking C-Spire’s market share of 5% and
dividing it by three to allocate its impact among C-Spire’s three national wireless
competitors.
35
by 2028. Additionally, Musey normalized forecasted capital expenditures based on
forecasted capital expenditures for Verizon Wireless. Further, Musey normalized
depreciation and amortization based on Verizon’s historical depreciation and
amortization as a percentage of capital expenditures. Under Scenario One,
Ramcell’s per share value is $21,047 or $21,403, depending on whether the model
assumes outstanding DTA balance of $18,376 or $12,817.
Musey’s Second Scenario assumes that Jackson already achieved the market
penetration that Verizon had reached nationally and that Jackson would grow in line
with Verizon national’s projections.169 Musey assumed in Scenario Two that
Jackson’s market penetration would trend from 95% of Verizon’s national
penetration rate in 2018 to 95% of Verizon’s national penetration rate in 2027 and
2028. Scenario Two assumes that Jackson’s share of subscribers in the Jackson
MSA jumps from 14% to 47% in year one of the DCF projection period.170 Besides
the market penetration assumptions, Musey made all the same assumptions from
Scenario One in Scenario Two. Under Scenario Two, Jackson’s per share value is
either $26,231 or $26,586, depending on whether the model assumes an outstanding
DTA balance of $18,376 or $12,817.
169
Tr. 44:17-21 (Musey).
170
JX 230, at 25.
36
For both Scenarios One and Two Musey adds the present value of what he
calls Excessive Capital Expenditures and the value of the DTA ending balance on
December 31, 2002.171 Musey finds Jackson’s historical data regarding capital
expenditures to be unreliable and erratic when compared to Verizon Wireless’s
historical capital expenditures. He opines that there was an excess in Jackson’s
capital expenditures, which justifies a $6,732 adjustment in Jackson’s per share
going concern value. Musey also opines that the present value of the DTA ending
balance on December 31, 2002, should be added to the per share going concern value
of the company. This is to make an adjustment for the allegedly incorrect capital
expenditures included in the calculation the DTA. The ending balance of the DTA
on December 31, 2002, was $42,240. Musey calculates the per share present value
of that amount to be $2,698. The present value of the ending balance of the DTA on
December 31, 2002, together with the present value of the “excessive capital
expenditures,” increases Jackson’s per share value under Scenario One to $30,833
and to $36,016 under Scenario Two. Musey did not persuasively show that
Jackson’s capital expenditures as reported by management were so unreliable and
excessive. Nor did he provide a well-reasoned explanation for why these two
171
JX 228, at 89 fig.13-1.
37
adjustments must be made or why they are simply tacked onto the final per share
valuation.
Musey did not convincingly demonstrate that management’s forecasts should
be rejected and that his forecasts, based on Verizon Wireless at a national level, are
more reasonable.
a. Musey does not provide convincing evidence that there
is no reasonable explanation for Jackson’s under
performance relative to Verizon Wireless or his
assertion that Jackson should be performing on par
with Verizon Wireless.
Musey posits there is “no plausible explanation for the massive magnitude of
Jackson’s underperformance relative to Verizon as a whole.”172 Musey states that
he would “expect [Jackson’s] market share, profit margins, and other operating
metrics to be closer to Verizon’s national average for its wireless business” without
support.173 Musey goes on to state, “[t]he reason for Jackson’s underperformance in
terms of market share relative to its parent is not apparent,” while discounting the
presence of competitors like C-Spire.174 Moreover, Musey looks at reported churn
rates for Verizon and for Jackson, finds a difference between the two, states that
there is no explanation for the difference, and assumes that Jackson’s numbers
172
JX 228, at 13.
173
Id.174
Id. at 47–48.
38
should mirror Verizon’s numbers.175 Musey continues through Jackson’s, financials
finding differences between Jackson’s numbers and Verizon’s numbers, and then
concludes that there is no reason for the differences each time.
From the premise that there is no reason for any difference between Jackson’s
metrics and Verizon’s metrics, Musey concludes that the best way to forecast
Jackson’s future performance is to assume that Jackson’s financial performance
should be on par with or trend towards Verizon’s overall performance.176 Musey
provides no support for this assumption other than the “significant unwarranted
differences between forecasted results for [Jackson] compared to the predicted
results for Verizon, in particular differences related to penetration rates and EBITDA
margins.”177 On the other hand, Respondent’s expert, Thompson, provides four
plausible explanations for why Jackson’s results could be different than Verizon at
a national level.
175
Id. at 50–51. For the period 2007 through 2017, Jackson’s churn rate increased from
1.59% in 2007 to 1.77% in 2017, with a low of 1.43% in 2011 and a high of 2.1% in 2014.
Verizon’s churn data is incomplete as there is no data available for 2017. In 2007,
Verizon’s postpaid wireless churn rate was 0.91%, and in 2009, it was 1.07%. The
minimum wireless customer churn rate for the period 2007 to 2012 was 1.19% and the
maximum was 1.38%. Churn is an industry metric to calculate market share and measures
of the number of subscribers who disconnect their service during a given period. In re
Cellular, 2022 WL 698112, at *13.
176
JX 228 at 81–85.
177
Id. at 81.
39
First, the existence of a significant regional competitor headquartered in the
Jackson MSA, C-Spire. Thompson showed, albeit anecdotally, that C-Spire
maintained a significant presence in Mississippi. He also persuasively showed that
Musey’s analysis likely understated C-Spire’s market penetration in the Jackson
MSA.
Second, Verizon/Alltel’s lack of prior incumbent local exchange carrier
(ILEC) services in the Jackson MSA.178 Verizon tended to have higher market share
in markets in which it had an existing customer base to sell its wireless services and
existing name recognition. Musey acknowledged that AT&T’s “ability to bundle
wireless and wireline services might enhance its competitive position against
Verizon.” 179
Third, Verizon was late to Jackson MSA, as Jackson had only operated under
the Verizon brand since 2009. This lack of brand recognition could contribute to
Jackson’s underperformance relative to Verizon Wireless nationally.180
178
An ILEC is a local telephone company that held a regional monopoly on landline
services before the market was opened to competitive local exchange carriers by the
Telecommunication Act of 1996. AT&T Corp. v. Iowa Utilities Bd., 525 U.S. 366, 371
(1999).
179
JX 228, at 48.
180
JX 230, at 11
40
Fourth, Verizon’s market share in terms of data usage lags in Mississippi
when compared to other regions in the United States.181
Thompson’s rebuttal is largely based on anecdotal evidence. Nevertheless, it
does provide the “plausible explanation” that Musey opines does not exist to explain
why Jackson’s market share is not the same as Verizon Wireless’s national market
share. In any event, Musey did not persuasively show that Jackson’s market share
in the Jackson MSA must be close to or at Verizon Wireless’s national average.
b. The data concerns identified by Musey do not justify
throwing out management forecasts and replacing
them with hypothesized numbers based on Verizon’s
national performance
Musey maintains that Jackson’s financials statements lack any integrity and
cannot serve as the foundation for reliable projections to value the Company.
Therefore, his projections should be adopted by the court. Musey is right in at least
one regard, management’s historical financials are undoubtedly wrong by some
unknown percentage. The NPA-NXX system for tracking Jackson subscribers, as
discussed above, is flawed. There surely are some number of Jackson NPA-NXX
numbers no longer operating primarily in Jackson and some number of non-Jackson
NPA-NXX numbers operating primarily in Jackson. Thus, management’s historical
181
Id. at 6.
41
financials are wrong by some percentage because service revenue is surely being
misallocated.
The fact that management’s financials are off by some percentage, however,
does not justify adopting another set of financial projections that are also off by some
percentage. Musey provides no explanation, other than his belief that there is no
reason for Jackson’s performance to not be on par with Verizon Wireless’s, as to
why his financial projections are more accurate. The court is disinclined to throw
out historical financials and trends in favor of hypothesized trends without a
convincing explanation as to why the hypothesized trends are likely to create a more
accurate projection of a company’s cash flow. At a minimum, the historical trends
are based on the number of Jackson MSA NPA-NXX numbers in existence which
tethers the financials to reality, albeit inaccurately.
Musey also points to unexplained jumps in revenues in 2010 and 2011, an
increase in the DTA balance in 2011, and spreadsheet cells that appear to pull in data
from other markets as a reason why this court should throw out management’s
projections based on the historical financials in favor of his hypothesized
projections.182 It appears that the cells linking to markets outside Jackson may be
182
JX 228, at 66–67.
42
the cause of the unexplained revenue jumps in 2010 and 2011.183 Further, Alltel
explained at trial that a large part of the DTA jump in 2011 was attributable to
Jackson’s purchase of cellular assets from Verizon.184 In the end, all Musey calls
into question is the reliability of management’s historical financials. But he does
not persuasively support replacing management’s projections that are based on those
historical financials with Musey’s projections that are based solely upon Verizon
Wireless’s overall performance.
c. Excessive Capital Expenditures Adjustment Is Not
Adequately Explained or Persuasive
Musey’s proposed adjustment to Jackson’s per share value due to what he
calls excessive capital expenditures is not adequately explained or persuasive.
Musey’s adjustment is based on the notion that historical capital spend is overstated
in management’s historical financials and that it should have been exactly Verizon’s
capital spend as a percent of revenues.185 As described in Thompson’s rebuttal
183
Id. at 68. For example, in the “Forecast” tab JX 139, cell M:21 references the following:
“=’\\tpap1lrebua01.verizon.com\Partnerships_Accounting\Industry
Relations\PARTACC\2010-2012 year folders\2011Audit\12543 Fresno\[12543 Fresno
2011 Audit.xlsm]Stats’!$F$30/1000” (emphasis added). This cell is supposed to provide
the beginning subscriber number for 2010, which the model uses as an input to calculate
subscriber revenue. Thus, it appears that the spreadsheet may be pulling data from the
wrong market.
184
Tr.I 134:16–136:9 (Junker).
185
JX 228, at 64–67.
43
report, Musey’s calculation of this excessive capital spend adjustment proceeds as
follows:
1. Verizon’s Capital Expenditures as a percent of revenue times
Jackson’s revenue from 2003 through 2018 equals theoretical capital
expenditures for Jackson. This amount totals $102.8 million.
2. Any historical capital expenditures in excess in Step 1 would be
considered excess and effectively damages for unasserted claims that
Jackson’s actual capital expenditures were [] legally improper. Any
deficit is effectively an offset to damages. The total Jackson capital
expenditures from 2003 through 2018 was calculated as $144.6 million
indicating, in Musey’s view, excess capital expenditures of $41.8
million.
3. The “present value” calculation effectively acts as a form of
prejudgment interest by assuming a 6.8% compounded rate of return
on any excess or deficit since 2003. This increases the $41.8 million
excess capital expenditures in Step 2 to $105.4 million. Of this $105.4
million value, $64.1 million is derived from the 2003 to 2008 period,
which is before Respondent acquired its interest in Jackson.186
Musey posits that this adjustment is necessary because management’s historical
financials are unreliable and overstated. Musey supports this contention by, among
other things, pointing out that management’s financials pull in capital expenditures
from a spreadsheet that looks to be associated with Fresno California.187 Although
this court finds the spreadsheet irregularities are of concern, but they do not warrant
the blunt remedy that Musey advocates.
186
JX 230, at 55.
187
Tr.1, at 36:22–37:23 (Musey).
44
Musey’s assumption that Jackson’s historical capital spend from 2003
onward should have been exactly Verizon’s capital spend as a percent of revenue is
flawed. Jackson is its own market with its own idiosyncrasies. Jackson’s capital
spend as a percent of revenue invariably departed from Verizon’s national capital
spend as a percent of revenue at some point between 2003 and 2018.
Musey also failed adequately to explain the financial valuation concepts and
principles that justify the adjustment. The excess capital expenditure adjustment is
only discussed briefly. To justify such a large adjustment in the per share value, a
more thorough and reasoned explanation is needed. What Musey presented was not
persuasive. Thus, this court declines to adopt an excess capital spend adjustment.
d. DTA Adjustment is Not Justified
Musey posits that an adjustment to Jackson’s per share value is justified
because of his belief that the capital expenditures included in the calculation of the
DTA are incorrect. Musey adjusted for this by “calculating (i) the present value
(using Verizon’s discount rate of 6.8%) of the difference between Jackson’s reported
capital expenditures and Jackson’s capital expenditures normalized using VZW’s
historical capital expenditures and (ii) the present value of the undocumented DTA
ending balance of December 31, 2002 of 42.240 million.”188
188
JX 228, at 67.
45
As described in Thompson’s rebuttal report “The ‘present value’ is actually a
future value calculation labeled within the Musey working papers calculated as the
$14.7 million increased at a WACC of 6.8% for 16 years to a total value of $45.2
million.”189 The increase of $30.5 million represents a theoretical return on the
balance similar to prejudgment interest.190
The DTA adjustment is not justified because it is not persuasively explained
or reasoned. Musey does not provide an explanation why this methodology is
appropriate to adjust for any errors in the DTA balance. Nor does he cite to any
academic literature, case law, or treatise to support his methodology. Further, as
pointed out in the Thompson rebuttal report, “it is unclear how the Company, or its
minority shareholders, could realize this value on a going concern basis as of the
Valuation date.”191 Thus, because the DTA adjustment lacks sufficient support and
explanation, the court declines to adopt it.
2. Thompson’s Approach
Thompson created his forecast by adjusting management’s projections created
in anticipation of the Jackson merger. Thompson started with the model that
189
JX 230, at 55.
190
Id.
191
Id.
46
Verizon’s management created in conjunction with merger planning.192 The base
model used the historical financials created by the PAG as a foundation for creating
its projections.193 Management’s model then used assumptions about the growth of
Jackson’s business to forecast Jackson’s performance into the future.194
The majority of Thompson’s adjustments to management’s model were
updates to the model based on actual financial results existing as of the valuation
date that were not available when management created its model.195 For example,
Thompson adjusted the number of subscribers for 2018 down from 93,500 to 91,515
based on Jackson’s actual results for that period. This data was not available when
management made its projections but should be incorporated to make the historical
financials current as of the valuation date.
Thompson also kept many forecasted metrics the same as management’s
model. For example, Thompson’s revised projections assume roaming revenue to
192
JX 227, at 28–29. Thompson’s base model was one of a few models created in
conjunction with the merger process and closely resembled the model used to calculate the
merger consideration.
193
JX 152A, at 10–11.
194
JX 137.
195
JX 227, at 29.
47
be identical to management’s forecasts and calculated all items associated with cost
of service based on the same formulas applied in management’s forecast.196
Thompson adjusted commission expense to correct for a discrepancy caused
by the adoption of Accounting Standards Codification topic 606 (“ASC 606”). ASC
606 changes the expensing of commissions from being immediately expensed to
being capitalized and expensed over a multi-year period. The impact of this change
was that for 2018, the financials understated commission expense by approximately
$0.8 million. Thompson adjusted the 2018 commission expense for that
understatement and used the base model’s assumption for the expected decline in
commission expenses during the remaining projection period.197
Thompson’s most significant alteration to Jackson’s financials was the EDGE
cash flow adjustment accounting for the bulk of the difference between the merger
consideration price and Thompson’s proposed valuation. Thompson disagreed with
management’s treatment of EDGE accounts receivable as a cash flow adjustment.198
In management’s model, an increase in EDGE receivables would decrease free cash
196
Id. at 31.
197
Id. at 32.
198
Id. at 33.
48
flow.199 Thompson treated any change in EDGE receivables as a cash-neutral event
because of Verizon’s practice of securitizing their EDGE receivables.200 Thompson
then constructed a hypothetical EDGE interest expense by:
1) Calculating the annual EDGE-related sales for each year of the projection
period by multiplying projected equipment revenue by the percent of
EDGE sales.
2) Estimating the annual projected EDGE balance as 25% of the prior year’s
equipment revenue and 75% of the current year’s equipment revenue,
assuming equipment sales occur evenly throughout the year and a two-year
payback period.
3) Multiplying the estimated edge balance by an interest rate of 3.30%.
Thompson calculated the 3.30% interest rate by choosing an interest rate
slightly below the midpoint between the average and weighted average of
the interest rate on Verizon’s asset-backed debt.
Thompson provided no explanation for why the projected EDGE balance would be
equal to 25% of the prior year’s equipment revenue and 75% of the current year’s
equipment revenue. Thompson also did not provide much explanation for his
reasoning as to why 3.30% was the correct estimated interest rate. Petitioners did
199
Id. Working capital = current assets(less cash) – current liabilities. When calculating
free cash flow (“FCF”) cash should not be included as a current asset for the purposes of
calculating working capital because cash is considered a non-operating asset. The change
in net working capital from the last period to the current period is subtracted out of free
cash flow because if current assets are rising, the business is investing cash in the business
in a way that is not captured on the income statement as an operational expense. In
management’s model, when EDGE receivables increased, current assets increased
resulting in an increase in current assets that decreased Jackson’s FCF.
200
Id.
49
not challenge this adjustment which results in a higher valuation over the merger
price. Although this court would have appreciated a better explanation of the EDGE
receivables adjustment in the expert reports, the briefing, or at trial because of the
significant impact it has on Jackson’s cashflows, this court accepts that the EDGE
transactions were a cashflow neutral event and that changes in the EDGE receivables
should not affect Jackson’s cashflows.
Importantly, Thompson does not attempt to make any revenue adjustments to
account for the shortcomings of the NPA/NXX subscriber tracking system.
3. The Court’s Weighted Average Approach
Neither party persuasively established that the projections used in their DCF
model were reliable. That is attributable to Jackson’s use of NPA/NXX to track
subscribers, which Petitioner demonstrated is outmoded and inherently unreliable
due to the advent of nationwide plans and number portability in the early years of
the new millennium. Vice Chancellor Laster detailed those shortcomings in In re
Cellular, where the valuation date was 2011. The weaknesses in using NPA/NXX
to track subscribers was surely no less pronounced at the time of the Jackson merger
in 2019.
Both sides have used management’s NPA/NXX subscriber data and revenue
forecast as the starting point for their own projections. Thompson did not attempt
to adjust management’s projections to subscriber revenue to account for any
50
shortcomings reflected in the use of NPA/NXX. Musey, on the other hand, adjusted
the projections to reflect Jackson’s subscriber base to converge with Verizon’s
national subscriber rate. Both sets of forecasts are less than ideal and unpersuasive.
Musey’s forecasts are unpersuasive because they make the unsupported
assumption that Jackson’s market penetration rates should be essentially the same as
Verizon nationals market penetration rates. Thompson’s forecasts are unpersuasive
because they fail to account for the distorting effect of the NPA/NXX subscriber
system. Because both parties have presented unpersuasive evidence, the court must
conduct its own analysis. Despite NPA/NXX’s flaws, the court is left with
NPA/NXX as the starting point for a key revenue driver in the DCF model.
This court finds that the appropriate solution is to create a blended share price
using two iterations of the model discussed below. The first iteration will use
Thompson’s financial projections and receive a weight of 70%. The second iteration
will use Thompson’s projection spreadsheet but incorporate Musey’s Scenario Two
wireless service revenue projection for 2019 and receive a 30% weight. The court
accomplished this by first forecasting the equipment revenue, roaming revenue, and
other revenue found in Thompson’s model for the year 2018 into 2019 using
Thompson’s growth rate for 2019. Then the court summed this revenue figure with
Musey’s 2019 wireless service revenue projection for 2019. This final sum then
served as the base revenue number upon which revenue is forecasted for the
51
remainder of the projection period. Revenue is forecasted to grow during the
projection period in accordance with Thompson’s posited revenue growth
percentages. The two iterations will then be averaged to arrive at Jackson’s per share
value. Those projections will not include Musey’s excess the capital expenditure or
DTA adjustments proposed by Musey.
This court uses Musey’s Scenario Two as opposed to Scenario One because
the experts in the case presented the court with two realities and Scenario Two better
captures Musey’s proposed state of the world. Thompson presented a world in
which the PAG’s subscriber records were accurate, and management’s forecasts
based off those records were reliable. Musey presented a world in which the PAG’s
records were unreliable, and that Jackson’s financial metrics should be on par with
Verizon Wireless’s national metrics because Jackson was an indistinguishable part
of Verizon’s national business. Scenario One reflects a transition from Thompson’s
posited state of the world to Musey’s posited state of the world over the projection
period. Thus, Musey’s Scenario Two is the appropriate model to average with
Thompson’s because it represents Musey’s proposed state of the world from the
outset of the projection period.
This court finds that weighting and averaging models that use Thompson’s
revenue projections and Musey’s Scenario Two revenue projections, while
imperfect, better reflects Jackson’s future revenue than either of the experts’ models
52
alone. Thompson’s model reflects revenue projections on the concrete, but
inaccurate, NPA/NXX subscriber tracking system. Musey’s model reflects an
attempt to adjust for the inaccuracies inherent in the outdated NPA/NXX system to
track subscribers. But it goes too far by assuming Jackson’s market penetration rate
is the same as Verizon Wireless’s nationwide rate with only small alterations. By
running Thompson’s model, as adjusted by this court, twice—once with
Thompson’s revenue projections and once with Musey’s revenue projections—the
court strikes a balance between two possible states of the world.
The respective weights of the models reflect the court’s credibility
determination of the two projections. Thompson’s management-based forecasts
were more credible than Musey’s because they were based on a metric that at one
time accurately reflected the Jackson’s market penetration. Musey’s forecasts,
however, made a welcome attempt to adjust for the inaccuracies created by the
NPA/NXX system. Without concrete subscriber data, the court’s weighted averaged
approach attempts to account for the drawbacks of using the NPA/NXX subscriber
accounting system exclusively to derive subscriber revenue.
53
C. The Discount Rate
The discount rate is the interest rate used to determine the present value of
future cash flows.201 Thompson used Jackson’s cost of equity as determined by his
capital asset pricing model as Jackson’s discount rate.202 Musey, on the other hand,
used Verizon’s weighted average cost of capital as Jackson’s discount rate.203
In a DCF model, the discount rate is typically the weighted average cost of
capital (“WACC”) to the firm.204 The WACC is “an average of the costs of all
sources of capital for the company, with each source weighted by its respective
percentage share in the capital structure of the company.”205 Generally, a company’s
sources of capital are equity and debt.206 The WACC is selected as the discount rate
because it represents the expected rate of return that market participants require in
order to attract funds to a particular company.207 In other words, the WACC
201
Finkelstein & Hendershot, at V.E.3.
202
JX 227, at 51.
203
JX 228, at 84, 87.
204
Finkelstein & Hendershot, at V.E.3.
205
Hintmann v. Fred Weber, Inc., 1998 WL 83052, at *3 (Del. Ch. Feb. 17, 1998).
206
Id.207
SHANNON P. PRATT & ASA EDUCATIONAL FOUNDATION, SHANNON PRATT’S VALUING
A BUSINESS 208 (6th ed. 2022).
54
represents the opportunity cost of forgoing the next best alternative investment.208
WACC can be expressed as follows:
𝑉𝑒 𝑉𝑑
𝑊𝐴𝐶𝐶 = × 𝐶𝑒 + (1 − 𝑡) × 𝐶𝑑
𝑉𝑒 + 𝑉𝑑 𝑉𝑒 + 𝑉𝑑
Where:
𝑉𝑒 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦
𝑉𝑑 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡
𝐶𝑒 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦
𝐶𝑑 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡
𝑡 = 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
The cost of equity is typically calculated through the capital asset pricing
model (“CAPM”).209 The CAPM is “a generally accepted method of determining a
company’s cost of equity by reference to the risk-free rate of return, the market risk
premium[,] and the differential between investment in a particular industry or
company and investment in a diversified portfolio of stocks.”210 Essentially, the
CAPM estimates the expected return of an investment based on its riskiness relative
208
Id.209
Finkelstein & Hendershot, at V.E.3(a).
210
Hodas v. Spectrum Tech., Inc., 1992 WL 364682, at *3 (Del. Ch. Dec. 8, 1992).
55
to the rest of the market.211 It achieves this by adding to the risk-free rate the risk
premium associated with investing in a diversified portfolio of stocks modified by a
particular stock’s riskiness relative to the rest of the market (i.e., beta). Other
premiums can be added to capture risks not captured by the general equity risk
premium (e.g., risks associated with investing in smaller companies). The expected
rate of return on equity can be understood to be its cost because it is the return that
an investor would require to invest in the company’s equity. The CAPM can be
expressed as:
𝐶𝑒 = 𝑅𝑓 + 𝐵(𝑅𝑃𝑚 ) + 𝑅𝑃𝑠
Where:
𝐶𝑒 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦
𝑅𝑓 = Rate of return available on a risk-free security as of the valuation date
𝐵 = Beta
𝑅𝑃𝑚 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 = 𝐸𝑅𝑚 − 𝑅𝑓
𝑅𝑃𝑠 = 𝑅𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑓𝑜𝑟 𝑠𝑚𝑎𝑙𝑙 𝑠𝑖𝑧𝑒
𝐸𝑅𝑚 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑚𝑎𝑟𝑘𝑒𝑡 𝑟𝑒𝑡𝑢𝑟𝑛
211
PRATT, supra note 207, at 222–23.
56
The CAPM model typically derives the risk-free rate from government
treasury obligations.212 Treasury bills are typically considered nearly free of default
risk because they are backed by the full faith and credit of the United States
government.213 The market risk premium is the excess of the expected rate of return
for a representative stock index over the riskless rate.214
Beta is a function of the excess expected return over the riskless rate on an
individual security relative to the excess expected return over the riskless rate on a
market index.215 Beta is determined by regressing the percentage change in stock
prices of the individual company against the percentage change in the overall stock
index.216 The beta for private companies must be estimated based on the betas of
comparable, publicly traded companies because a privately held company does not
have stock returns against which to regress the market’s returns.217
When estimating a private company’s beta by taking the mean of other
companies’ betas, it is important to select public companies that are comparable to
the private company. Comparable companies are generally defined as companies in
212
Finkelstein & Hendershot, at V.E.3(a) n.146.
213
PRATT, supra note 207, at 214–15
214
Id. at 216–17.
215
Id. at 222–32.
216
Id.
217
Id.
57
the same line of business or more generally, companies that are affected by the same
economic forces that affect the firm being valued.218 To check if a group of
comparable firms is truly comparable, one can “estimate a correlation between
revenues or operating income of the comparable firms and the firm being valued.”219
If the correlation is high, the firms are comparable.220
A size premium may be added when determining the cost of equity for a
smaller company “to account for the higher rate of return demanded by investors to
compensate for the greater risk associated with small company equity.”221
When valuing a division or line of business within a company, it is generally
accepted that one “cannot simply apply the company’s overall WACC to determine
the value of each individual business, if the risk profiles are different.”222 This is
because the firm is viewed as a portfolio of businesses comprised of its division,
with each such business or division having distinctive characteristics.223 Thus,
218
Aswath Damodaran, Private Company Valuation, https://pdfs.semanticscholar.org/
c94a/584368b85eb7197c66f910db970a759b3010.pdf (last visited Sept. 12, 2022);
ROBERT W. HOLTHAUSEN & MARK E. ZMIJEWSKI, CORPORATE VALUATION: THEORY,
EVIDENCE & PRACTICE 527–30 (2014).
219
Damodaran, supra note 218.
220
Id.
221
Gearreald v. Just Care, Inc., 2012 WL 1569818, at *10 (Del. Ch. Apr. 30, 2012).
222
SHANNON P. PRATT & ROGER J. GRABOWSKI, COST OF CAPITAL: APPLICATIONS AND
EXAMPLES 469 (4th ed. 2010).
223
Id.58
generally, when valuing a distinct part of a business, a distinct WACC for that part
of the business should be calculated. Nevertheless, being a member of a division of
a larger company can mitigate risks associated with being a smaller division.224 For
example, the credit quality of the larger company affects the cost of debt for the
division.225 Moreover, in a larger company, there “may be firmwide integration of
the financing function and a consequent reduction in the apparent risks of business
size of a [smaller] division . . . .”226
1. Thompson’s Approach
In determining the appropriate discount rate with which to value Jackson,
Thompson only included Jackson’s cost of equity.227 Thompson supported his
decision to not include Jackson’s cost of debt in his discount rate by stating in his
rebuttal report:
Functionally, the only debt that Jackson had immediate access to was
the DTA from Verizon. The DTA was being paid down over the prior
several years and becoming a smaller part of the capital structure for
Jackson. The proper approach to discounting the cash flows in the DCF
was to use the cost of equity and account for the payoff of the DTA as
performed in the Thompson Opening Report.228
224
Id. at 472.
225
Id.
226
Id.
227
JX 230, at 39.
228
Id.
59
Thompson estimated Jackson’s cost of equity from the perspective that
Jackson is a standalone entity, separate from its corporate parent.229 This perspective
was based on the position that the value of business units should be measured
separately from their corporate parents.230
To estimate Jackson’s cost of equity, Thompson used the CAPM. For the
risk-free rate, he used the yield on the 20-year U.S. Treasury bonds as of the
valuation date—2.73%.231 Thompson estimated beta by examining the unlevered
betas for a group of “comparable” firms. Thompson sourced his comparable
companies from S&P’s CapitalIQ financial database.232 His selection methodology
consisted of procuring “a Telecommunication Services report listing all publicly
traded Telecommunication Services companies” and then screening the list to
include only companies traded on major U.S. Exchanges.233 Thompson further
screened this list by removing a company with a statistically insignificant beta and
229
JX 227, at 44.
230
Petitioner argues that Thompson’s opinion should be disregarded because he did not
value Jackson as a “going concern,” denying the Company’s operative reality as of the date
of the merger. Petitioner’s Opening Br. 42-43. The court disagrees. Thompson explained
that he valued Jackson as a going concern, recognizing its operation under the Verizon
umbrella. See, e.g., Tr. 391:2-4; 392:24-393:12; 393:22-24; 394:8-11; 395:14-17
(Thompson).
231
Id. at 46.
232
Id. at 48.
233
Id. at 50.
60
excluding AT&T because “less than half of its revenue is derived from the wireless
business.”234 He then determined the median beta of these companies over various
time periods. Then, Thompson selected the median of the median betas as Jackson’s
proxy beta. Finally, Thompson re-levered this median beta using Jackson’s implied
financial leverage of 10% debt and 90% equity resulting in a levered beta of 0.80.235
Thompson did not explain in his report how he determined Jackson’s implied
financial leverage or why he used this implied metric over some other metric. From
his spreadsheet model, it appears that Thompson calculated the implied financial
leverage by taking a modified version of the indicated value of 100% of the equity
as determined by his DCF model and then comparing that amount with the DTA
balance as of March 31, 2019.236
Thompson’s selection of his comparable companies did not inspire confidence
in his approach. For example, Musey points out that Lumen and Cincinnati Bell are
not in the wireless business.237 That alone might not render them not comparable.
234
Id at 47 n.79. This left the following companies: 1) Verizon Communication Inc., 2) T-
Mobile US, Inc., 3) Lumen Technologies, Inc., 4) United States Cellular Corporation, 5)
Cogent Communications Holdings, Inc., 6) Shenandoah Telecommunication Company, 7)
Cincinnati Bell Inc., 8) Consolidated Communication Holdings, Inc., 9) Alaska
Communications Systems Group, Inc.
235
JX 227, at 48.
236
JX 227A (DCF tab & CAPM tab).
237
JX 229, at 17–32.
61
But Thompson removed AT&T from his list of comparable companies initially
because less than half of its revenues were derived from wireless revenues. He does
not explain this inconsistency. Further, Thompson does not provide a reasoned
analysis for his selection of comparable companies beyond the aforementioned
exclusions and fails to conduct any tests to ensure the comparability of his selected
comparable companies.
Thompson selected the long-horizon expected equity risk premium of 6.04%
as his equity risk premium.238 This premium represents the average difference
between the returns on large stocks and long-term government bonds from 1926 to
2017 adjusted for historical changes in price-to-earnings ratios.
Thompson applied a size premium of 5.22%, which was the size premium for
companies in the 10th decile by market capitalization. This premium is the premium
that the Duff & Phelps Cost of Capital Navigator suggests for companies that have
a market capitalization between $2.5 million and $322 million. Under Thompson’s
methodology, the implied market capitalization of Jackson, using the squeeze-out
price of $2,963 per share, is $46 million which places it in that range.
Combining the above inputs, Thompson concluded that Jackson’s cost of
equity was 12.9%. The below describes how Thompson arrived at his cost of equity:
238
JX 227, at 50.
62
𝐶𝑒 = 𝑅𝑓 + 𝐵(𝑅𝑃𝑚 ) + 𝑅𝑃𝑠
𝐶𝑒 = 2.73% + 0.80(6.14%) + 5.22%
𝐶𝑒 = 12.9% (rounded)
Because Thompson did not include the cost of debt in his discount rate, Jackson’s
cost of equity was Thompson’s selected discount rate.
2. Musey’s Approach
Musey eschewed the CAPM model and simply assumed that Jackson’s
WACC was the same as Verizon’s WACC.239 Musey based this assumption on his
assertion that Jackson was a fully integrated part of Verizon Wireless.240 He claimed
that Jackson’s integration warrants using Verizon’s cost of capital because this is a
more accurate reflection of Jackson’s operative reality and associated risks.241 To
support this contention, Musey cites to In re AT&T Mobility Wireless Operations
Holdings Appraisal Litigation, in which the court used AT&T’s levered beta and
capital structure to value one of AT&T’s subsidiaries because it reflected the
239
JX 228, at 84, 87.
240
Id. at 80.
241
JX 229, at 41.
63
integrated, affiliated nature of the business.242 Musey concludes that Verizon’s 6.8%
WACC should be the discount rate applicable to Jackson.243
3. The Court’s Blended Approach
The court concludes that an approach which blends Thompson’s and Musey’s
analyses should be used to determine Jackson’s discount rate. Jackson’s cost of
capital must take into consideration the reality that Jackson benefits from its
relationship with Verizon.
a. Risk-Free Rate
This court accepts Thompson’s use of the rate of return on a twenty-year
United States Treasury bond of 2.73% as of the valuation date for the risk-free rate.
Additionally, the court accepts the use of the long-horizon expected equity risk
premium of 6.04% as the equity risk premium. Both inputs to the model comport
with standard methodology and do not raise a significant issue.
b. Capital Structure and Beta
Jackson’s capital structure and beta are assumed to be that of Verizon’s, which
reflect the degree to which Jackson was integrated with Verizon. The use of
Verizon’s capital structure and beta is supported by the lack of a sufficiently
convincing alternative analysis. Thompson took an inconsistent approach in
242
2013 WL 3865099, at *4 (Del. Ch. June 24, 2013).
243
JX 229, at 41.
64
determining Jackson’s beta, including companies that do not operate in the wireless
industry, while excluding AT&T because less than half of its revenue is attributable
to the wireless business. Using Verizon’s beta reflects the operative reality that
Jackson was operated, branded, and financed by Verizon.244 It is also the approach
taken in the closely analogous precedents of In re Cellular and In re AT&T Mobility,
where the court valued a telecommunications partnership similarly intertwined with
its parent.245 Following this precedent, this court believes that it is similarly
appropriate to use Verizon’s beta and capital structure. Thus, this court adopts
Verizon levered beta of 0.65 using a five-year weekly lookback period. This court
further adopts Verizon’s capital structure of 30% debt and 70% equity as presented
in Thompson’s rebuttal report and trial testimony.246
c. Size Premium
Appling a size premium increases the company’s cost of equity, resulting in
an increase in the discount rate. “That in turn lowers the present value of cash flows
and results in a lower valuation estimate.”247
244
Tr.I 285:6–19; Junker Dep. 89:6–87:12 (Macuszonok).
245
In re Cellular, 2022 WL 698112, at *53; In re AT&T Mobility, 2013 WL 3865099, at
*4.
246
JX 230, at 36, Schedule D-2; Tr.II 345:6–21 (Thompson).
247
In re Cellular, 2022 WL 698112, at *53.
65
“The use of a size premium is a subject of some controversy.” 248 Musey
insists that a size premium is inappropriate here, because Jackson was a fully
integrated part of Verizon’s larger, nationwide business operations and does not face
the traditional non-diversifiable risk that apply to small companies.249 He also points
to other decisions of this court that did not apply a size premium.250 Musey criticizes
the specific size premium applied by Thompson because the 10th Decile Size Premia
Studies used in the Thompson Report “include large numbers of distressed
companies and those with negative earnings.”251 Musey states that these companies
are inappropriately included in the calculation of Jackson’s size premium because
Jackson is neither distressed nor revenue negative.
Ramcell’s objected to applying any size premium, but did not meaningfully
join issue on the appropriate the actual percentage of the premium in the event the
court were to conclude one is warranted. Except for a passing criticism of the types
248
Dunmire v. Farmers & Merchants Bancorp of W. Penn., Inc., 2016 WL 6651411, at
*12 n.139 (Del. Ch. Nov. 10, 2016); see JX 229, at 35. Musey acknowledges that he is
“not taking the position that size premiums are never applicable.” JX 229, at 34.
249
JX 229, at 36.
250
JX 229, at 35 (citing Merion Cap. L.P. v. Lender Processing Servs., Inc., 2016 WL
7324170, at *29 (Del. Ch. Dec. 16, 2016) (declining to use a size premium); AT&T
Mobility, 2013 WL 3865099, at *4 (declining to include a small company risk premium in
an appraisal action involving small cellular companies operated as part of the parent’s
nationwide network).
251
JX 229, at 35.
66
of companies contained in the tenth decile of the Duff & Phelps data, Musey did not
challenge Thompson’s figure of 5.99%.
The court agrees that a size premium is appropriate in this case, but it must
reflect the reality of Jackson’s integration in and heavy reliance upon Verizon. “This
Court may adjust a company’s size premium where sufficient evidence is presented
to show that the company’s individual characteristics make it less risky than would
otherwise be implied under its corresponding Ibbotson decile based on size
alone.”252 Those characteristics are present here. Thompson did not attempt to risk
adjust his size premium.
An adjustment to the size premium is necessary here to recognize the
operative reality that Jackson was a Verizon division, operating under the network
brand with unconditional support from the mothership. Thompson did not attempt
to calibrate his size premium to the operative reality. Conversely, the Petitioner has
not offered any meaningful help. Ramcell simply rolled the dice on the size premium
issue, taking an all-or-nothing approach.
In re Cellular is a closely analogous case, involving a national wireless
company acquiring the remaining equity interests that it did not already own in
several small cellular partnerships. The court noted that in two prior appraisal cases
252
Gearreald, 2012 WL 1569818, at *12.
67
“involving similar market-level entities” the court came to different conclusions on
whether to apply a size premium,253 but on the record before it was persuaded that a
size premium, subject to reasonable adjustment, was appropriate.254
The court is persuaded that a size premium should be applied to Jackson’s
cost of equity to reflect the notion that one “cannot simply apply the company’s
overall WACC to determine the value of each individual business, if the risk profiles
are different.”255 Jackson has distinct risks from Verizon as a whole as its operations
are geographically confined to a three counties with income levels and population
growth below the national average.256 Verizon, as a whole, operates on a national
basis serving regions of varying density, income levels, and population growth.257
Thus, different risk factors affect Verizon and Jackson and it is appropriate to adjust
Jackson’s cost of equity to capture how Jackson’s size affects its riskiness.
253
In re Cellular, 2022 WL 698112, at *54 (citing AT&T, 2013 WL 3865099, at *4
(declining to apply a size premium), and B&L Cellular v. USCOC of Greater Iowa, LLC,
2014 WL 5342715, at *2 (Del. Ch. Dec. 8, 2014) (adopting the use of a size premium
where the local partnership was operated as part of the larger national cellular company)).
254
In re Cellular, 2022 WL 698112, at *54. Petitioner here did not address this aspect of
the In re Cellular decision in its post-trial briefs. Notably, Musey was an expert for the
plaintiffs in that case, who were also represented by some of the same counsel representing
the Petitioner in this case.
255
PRATT, supra note 207, at 469
256
JX 227, at 19–22.
257
JX 230, at 12.
68
Nevertheless, the size premium should reflect the reality that the risks associated
with Jackson’s size are mitigated by Jackson’s integration with Verizon.
In In re Cellular, the defendant’s expert started with a 3.99% premium
indicated by the micro-cap decile from the 2010 Ibbotson SBBI Yearbook, and then
subtracted 1-percentage point “to reflect AT&T’s involvement for a total size
premium of 2.99%.”258 The court found this adjustment to be based upon a
“reasoned judgment” and accepted it.259 Here, the court applies a size premium of
3.22% to Jackson, which reflects a two percentage point reduction from Thompson’s
calculation.
The calculation of Jackson’s cost of equity can be seen below:
𝐶𝑒 = 𝑅𝑓 + 𝐵(𝑅𝑃𝑚 ) + 𝑅𝑃𝑠
𝐶𝑒 = 2.73% + 0.65(6.14%) + 3.22%
𝐶𝑒 = 9.9% (rounded)
d. Cost of Debt and Tax Rate
The court applies a 4.0% cost of debt for Jackson, using Thompson’s
calculation of Verizon’s cost of debt. Thompson arrived at a 4.0% cost of debt for
Verizon “based on the midpoint between the yields on Verizon’s most recently
258
In re Cellular, 2022 WL 698112, at *54.
259
Id.69
issued long term debt as of the Valuation Date.”260 Although Jackson had access to
debt at the applicable federal funds rate through the DTA balance, using Verizon’s
cost of debt is consistent with the adopted approach of using Verizon’s capital
structure and beta.261 This court further adopts a 26.0% corporate tax rate for the
purposes of calculating Jackson’s WACC as presented in both Musey’s and
Thompson’s rebuttal reports.262
e. WACC Calculation
With all the elements of Jackson’s WACC accounted for, Jackson’s WACC
can be seen represented below:
𝑉𝑒 𝑉𝑑
𝑊𝐴𝐶𝐶 = × 𝐶𝑐 + (1 − 𝑡) × 𝐶𝑑
𝑉𝑒 + 𝑉𝑑 𝑉𝑒 + 𝑉𝑑
𝑉𝑒
= 𝐸𝑞𝑢𝑖𝑡𝑦 𝑃𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 = 70%
𝑉𝑒 + 𝑉𝑑
𝑉𝑑
= 𝐷𝑒𝑏𝑡 𝑃𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 = 30%
𝑉𝑒 + 𝑉𝑑
𝐶𝑒 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 9.9%
𝐶𝑑 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡 = 4%
𝑡 = 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 = 26%
260
JX 230, at 36 & 36 n.53.
261
See In Re Cellular, 2022 WL 698112, at *53 (adopting the same approach and using
AT&T’s cost of debt).
262
JX 229, at 45; JX 230, at 36.
70
𝑊𝐴𝐶𝐶 = 70% × 9.9% + 30%(1 − 26%) × 4%
𝑊𝐴𝐶𝐶 = 7.847%
As shown above, this court adopts a WACC of 7.847% for Jackson.
D. The Terminal Value
The terminal value is the present value of all the company’s future cash flows
beginning after the projection period.263 There are several methods available to
calculate the terminal value.264 Here, both Musey and Thompson agree that a
perpetual growth method is the most suitable approach for calculating Jackson’s
terminal value.265 Musey and Thompson, however, rely on different perpetual
growth rates and different types of perpetual growth models to determine Jackson’s
terminal value. Musey opines that the growth rate should be 2.77% while Thompson
believes that it should be 2.00%. Further, Musey believes that the standard Gordon
Growth Model (“GGM”) should be used while Thompson believes that the
McKinsey Value Driver (“MVD”) should be used. A 2.20% growth rate, calculated
using a slightly altered version of Musey’s methodology, is appropriate. On the
other hand, this court believes that Thompson’s MVD model with some alterations
is the more appropriate model for valuing Jackson.
263
Finkelstein & Hendershot, supra note 131, at V.E.2.
264
Id.
265
JX 227, at 51; JX 228, at 81–82.
71
A perpetual growth model assumes cash flows to grow at a constant rate in
perpetuity.266 Essential to this assumption is the selection of the correct growth rate.
It should be recognized at the outset that “ascertaining a growth rate in
perpetuity . . . is an inherently speculative exercise.”267 The general bounds of the
perpetuity growth rate are the rate of inflation at a minimum and the nominal rate of
growth in the economy. As described in the 3M Cogent decision:
“A viable company should grow at least at the rate of inflation
and . . . the rate of inflation is the floor for a terminal value estimate for
a solidly profitable company that does not have an identifiable risk of
insolvency.” But, a terminal growth rate should not be greater than the
nominal growth rate for the United States economy, because “[i]f a
company is assumed to grow at a higher rate indefinitely, its cash flow
would eventually exceed America’s [gross national product].”268
The growth rate should be justifiably related to the company being valued or its
industry. “Without a valid explanation, the use of a generic growth rate is inherently
flawed and unreasonable” especially when industry growth rates are available.269
266
JRC Acquisition, 2004 WL 286963, at *2.
267
Id. at *4.
268
3M Cogent., 2013 WL 3793896, at *21 (first quoting Global GT LP v. Golden Telecom,
Inc., 993 A.2d 497, 511 (Del. Ch. 2010); then quoting BRADFORD CORNELL, CORPORATE
VALUATION: TOOLS FOR EFFECTIVE APPRAISAL AND DECISION MAKING 146–47 (1993)).
269
Dobler v. Montgomery Cellular Hldg. Co., 2004 WL 2271592, at *10 (Del. Ch. Oct. 4,
2004) (internal quotations omitted), aff’d in relevant part, rev'd on other grounds, 880 A.2d
206 (Del. 2005).
72
1. The Growth Rate
Thompson unconvincingly used generic growth rates to estimate Jackson’s
perpetuity growth rate. Thompson begins his discussion of the long term growth
rate by appealing to generalized rules about what growth rates should be, stating:
“[f]or companies that have normal . . . long term growth prospects the [perpetuity
growth rate] should mirror the inflation rate plus the long-term real growth rate of
the overall economy . . . .”270 Thompson then provides a table of various long-term
nominal growth rates and proceeds to summarily state that one half of the nominal
economic growth forecasts, 2.00%, is an appropriate growth rate, “based on the
history of declining ARPU both at the [c]ompany and industry levels along with the
low to negative growth in population for Jackson MSA.”271 His estimate effectively
assumes no inflationary growth but a small amount of real growth.272
Thompson’s approach is unconvincing because of its reliance on generic
growth rates and its unreasoned decrease of the nominal United States growth rate
by half. Thompson fails to look at industry growth rates. Further, Thompson does
not support his decision to cut his chosen generic growth rates in half. Although,
Thompson does point to declining ARPUs and the low to negative growth in
270
JX 227, at 52.
271
Id. at 53.
272
Id.
73
population for the Jackson MSA, he does not explain why these general trends justify
a halving the United States nominal growth estimates. Thompson’s assumption that
Jackson will experience no inflationary growth, but a small amount of real growth
is not convincingly supported and the court declines to adopt it.
Musey, on the other hand, persuasively presents the average of industry
growth forecasts discounted for Jackson MSA-specific characteristics as the long-
term growth rate for Jackson. Musey averaged the consensus analyst forecast for
Verizon’s long-term growth rate, the SNL Kagan Wireless Industry forecasted
growth rate for the wireless industry, and the growth rate from a prior court of
Chancery wireless valuation opinion.273 The average of these rates was 3.37%.
Next, Musey decreased the average growth rate by the difference between Jackson’s
five-year trailing population growth and the United States’ five-year trailing
population growth. The difference between the population growth rates was 0.60%,
resulting in Musey’s long-term growth rate was 2.77%.274
273
JX 228, at 72. The wireless industry growth estimates used by Musey were 1)
Consensus Analyst Long-Term Growth for Verizon: 3.02%; 2) Consensus Analyst
Revenue Growth for Verizon OVERALL (2018–2022): 1.54%; 3) SNL Kagan Wireless
Industry Revenue Growth (2018–2022): 3.12%; 4) Consensus Analyst EBITDA for
Verizon (2018–2022): 3.32%; 5) SNL Kagan Wireless Industry EBITDA Growth (2018-
2028): 3.33%; 6) Consensus Analyst Free Cash Flow growth for the Verizon (2018–2022):
7.00%; 7) Verizon Free Cash Flow Growth for the Partnership (2019–2028): 2.3%; 8)
Delaware Chancery: Concluded Long-Term Growth of Spring/Clearwire: 3.35%.
274
JX 22, at 72.
74
Musey convincingly presented his long-term growth rate because it was based
on industry specific growth rates and factors unique to the Jackson MSA. Although
Musey does not explain the exact mathematical or numeric relationship between
population and the long-term growth rate implicit in his calculation of the 2.77%
number, his reliance on an average of industry specific growth rates discounted by
Jackson specific factors is more convincing than Thompson’s use of generic growth
rates slashed in half.
At trial and in his rebuttal report, Thompson raises serious concerns as to the
data used in Musey’s average. Thompson states that he went to the same database
that Musey did for his averages and pulled completely different numbers.275 Using
the “corrected” numbers that he pulled from the database, Thompson found that the
long-term growth rate should be 2.02% using Musey’s methodology. Musey did not
address this at trial.
Thompson also raised concerns about the inclusion of an outlier in Musey’s
calculation of the average of growth rates. Musey included in his average a growth
a 7.00% analyst forecasted growth rate for Verizon’s free cash flows between 2018
and 2022. Thompson points out that, “using a long-term growth rate of 7.0% and a
WACC of 6.8% would result in a negative capitalization rate, and thus an irrational
275
JX 230, at 45; Tr.II 354:2–355:8 (Thompson).
75
value for the perpetuity value.”276 Removing the 7.00% outlier from the average
results in a long-term growth rate of 2.20% under Musey’s methodology.
This court is not able to determine which numbers from Musey’s database are
correct. This court, however, finds that the inclusion of the 7.0% growth rate was
not internally consistent with Musey’s proposed valuation and believes that it should
be removed from the calculation of the average long-term growth rate. Thus, this
court adopts Musey’s growth rate, modified to 2.20%.
2. Gordon Growth Versus Value Driver
Although Musey and Thompson agree that a perpetual growth model is the
best method for calculating Jackson’s terminal value, they disagree over which
model to use. Musey used a standard GGM, whereas Thompson suggests a MVD
method. The court used the MVD model for calculating Jackson’s terminal value.
a. The Gordon Growth Model
The GGM is a simple model that calculates the present value of an infinite
stream of cash flows.277 It can be understood as “equivalent to a discounted future
cash flow analysis with certain simplifying assumptions, namely, (a) earnings grow
at a constant rate into perpetuity and (b) all earnings are either distributed to
276
JX 230, at 42. A company whose growth rate exceeds their WACC in the long-term
would present a riskless arbitrage opportunity that would attract all capital.
277
PRATT, supra note 207, at 194–95.
76
shareholders or, if retained by the company, reinvested at the discount rate.”278 The
GGM is expressed as:
𝐹𝐶𝐹𝑡 × (1 + 𝑔)
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 =
𝑊𝐴𝐶𝐶 − 𝑔
Where:
𝐹𝐶𝐹𝑡 = 𝐹𝑟𝑒𝑒 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑
𝑔 = 𝑡ℎ𝑒 𝑙𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
𝑊𝐴𝐶𝐶 = 𝑡ℎ𝑒 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑡𝑜 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚
This GGM presents both positives and negatives as a method for calculating
the terminal value of a company. Beginning with the positive, the GGM is simple
and easy to understand. It is not difficult to take the last period’s cash flows, increase
them by the growth rate, and then calculate a perpetuity based on the discount value
reduced by the growth rate. Further, it is a theoretically sound and widely accepted
means of calculating the terminal value.279
There are downsides to the GGM. For instance, the GGM is very sensitive to
small changes in the discount rate or growth rate. A slight change in either metric
278
Z. CHRISTOPHER MERCER, THE INTEGRATED THEORY OF BUSINESS VALUATION 22
(2004).
279
Crescent/Mach I P’ship, L.P. v. Turner, 2007 WL 2801387, at *14 (Del. Ch. May 2,
2007).
77
will lead to large swings in the terminal value of the company. 280 Moreover, the
GGM does not explicitly deal with the amount of capital investment required to
sustain the selected long term growth rate.281
b. The Value Driver Model
The VDM (or McKinsey formula) is an alternative to the GGM, which makes
explicit the relationship between growth, free cash flow, and invested capital. The
Court of Chancery “has accepted the [VDM] in other cases, sometimes referring to
it as the convergence theory.”282 The VDM is based on the notion that without
investment the firm cannot grow in perpetuity.283 To effectuate this notion, the VDM
280
The below chart demonstrates how the terminal value of a firm with $10,000 in FCF
can drastically change with small adjustments in the WACC or long-term growth rate for
the firm.
g
WACC 0% 2% 4%
10% $10,000 $12,500 $16,667
12% $8,333 $10,000 $12,500
14% $7,143 $8,333 $10,000
Clifford S. Ang, Terminal Values in DCFs, (Nov. 20, 2019),
http://quickreadbuzz.com/2019/11/20/business-valuation-clifford-ang-terminal-values-in-
dcfs.
281
Id.282
Fir Tree Value Master Fund, LP v. Jarden Corp., 236 A.3d 313, 332 (Del. 2020).
283
Id. at 333. An expert in Fir Tree stated: “[the VDM] matches the economic
precepts . . . of being more rigorous about quantifying the link between growth and
investment, that growth is not free, and linked to the return on capital.” Id.
78
links the long-term growth rate and the net investment during the terminal period
through the following formula:
𝑔
𝑁𝑂𝑃𝐴𝑇𝑡+1 × (1 − )
𝐶𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒𝑡 = 𝑅𝑂𝑁𝐼𝐶
𝑊𝐴𝐶𝐶 − 𝑔
Where:
𝑁𝑂𝑃𝐴𝑇𝑡+1 = 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
𝑔 = 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
𝑅𝑂𝑁𝐼𝐶 = 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑛𝑒𝑤 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑔
= 𝑖𝑚𝑝𝑙𝑖𝑒𝑑 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒
𝑅𝑂𝑁𝐼𝐶
𝑊𝐴𝐶𝐶 = 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
The above formula attempts to model the growth of a company in perpetuity
while accounting for the notion that any growth in perpetuity must be funded by
capital expenditure (i.e., a “plowback” amount, also called the “required
reinvestment rate”). The plowback is the “amount of investment at the terminal
period required to support the projected growth during the terminal period.”284 The
VDM takes net operating profit after tax in the terminal period and reduces it by one
minus the implied reinvestment rate. The implied reinvestment rate is calculated by
284
Id. at 321 n.33.
79
taking the growth rate and dividing it by the return on new invested capital
(“RONIC”). RONIC measures the return on capital invested during the terminal
period.285 RONIC should be set so that it is consistent with expected competitive
conditions.286 Economic theory suggests that competition will eventually eliminate
abnormal returns. This means that in competitive industries RONIC should equal
WACC.287 If, however, a business has a sustainable competitive advantage provided
by things such as network effect, brands, or patents, it is not appropriate to assume
that RONIC equals WACC because a business with a sustainable competitive
advantage can demand supranormal rents over the long run.288
An interesting byproduct of the VDM where RONIC equals WACC is that
the growth term falls out of the equation and the VDM can be expressed as a
simplified equation:
285
TIM KOLLER, MARC GOEDHART & DAVID WESSELS, VALUATION: MEASURING AND
MANAGING THE VALUE OF COMPANIES 250, 260 (6th ed. 2015) [hereinafter “McKinsey”].
286
Id. at 250.
287
Id. (“Economic theory suggests that competition will eventually eliminate abnormal
returns, so for companies in competitive industries, set RONIC equal to WACC”).
288
Id. (“[F]or companies with sustainable competitive advantages (e.g., brands and
patents), you might set RONIC equal to the return the company is forecast [sic] to earn
during later years of the explicit forecast period”); Id. at 262 (“Many financial analysts
routinely assume that the incremental return on capital during the continuing period will
equal the cost of capital . . . . For some businesses, this assumption is too conservative. For
example, both Coca-Cola’s and PepsiCo’s soft-drink businesses earn high returns on
invested capital and their returns are unlikely to fall substantially as they continue to grow,
due to the strength of their brands, high barriers to entry, and limited competition.”).
80
𝑁𝑂𝑃𝐴𝑇𝑡+1
𝐶𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒𝑡 =
𝑊𝐴𝐶𝐶
Thus, this formulation essentially moots any discussion of the long-term growth
rate.289 The McKinsey textbook states that, “The fact that the growth term has
disappeared from the equation does not mean that the nominal growth in [NOPAT]
is zero. The growth term drops out because new growth adds nothing to value, as
the RONIC associated with growth equals the cost of capital.”290
As with the GGM, there are benefits and drawbacks of the VDM. A benefit
of the VDM is that it is less sensitive to changes in WACC and g than the GGM. 291
Further, it quantifies the link between growth and required investment.292 A
drawback of the VDM is its potential to undervalue companies that have sustainable
competitive advantages when RONIC is assumed to be equal to WACC.293 Further,
firms that have yet to reach a steady state due to their fast growth may be
undervalued by the VDM where RONIC is set to equal WACC.294
289
The long-term growth rate is still relevant in calculating the terminal period’s cashflows
from the projection period’s last period.
290
McKinsey, supra note 285, at 262.
291
Ang, supra note 280.
292
André Thormann & Henrik Foged Rasmussen, The Discounted Cash Flow Terminal
Value Model as an Investment Strategy 39 (May 2019) (Master of Science in Finance and
Accounting Thesis, Copenhagen Business School).
293
Id.
294
Id. at 42.
81
c. The Court’s Selected Terminal Value Calculation
The Court of Chancery has accepted both GGM and the VDM as valid means
calculating a firm’s terminal value.295 In this case, Thompson’s presentation of the
MVD is more persuasive. This court is convinced of the need to account for the
investment necessary to sustain the long-term growth rate into perpetuity because to
grow, a company must invest. There is no free growth, and, in this case, the court
finds that the terminal value model should make this concept explicit. Further,
Thompson presented an illuminating demonstration of Musey’s model’s implied
return on invested capital (“ROIC”) for his two models. Thompson showed that the
implied ROIC for Musey’s Scenario One and Scenario Two were 192.88% and
227.37% respectively.296 Although numbers like this can likely be created for any
model that calculates terminal value using the GGM, this presentation contributed
to the court’s decision to adopt the VDM in this case.297 Further, the court adopts a
295
Fir Tree, 236 A.3d, at 332 (“The Court of Chancery has accepted the McKinsey
formula in other cases, sometimes referring to it as a convergence theory.”);
Crescent/Mach I P'ship, L.P. v. Turner, 2007 WL 2801387, at *14 (Del. Ch. May 2,
2007) (“Appraisal actions have used the Gordon Growth method to determine the
appropriate terminal value in a DCF calculation.”).
296
JX 230, at 50.
297
In fact, a GGM that assumes depreciation and amortization equal to capital expenditure
and no change in working capital in the final period would imply an infinite return on
𝑔
capital. lim Where n = net reinvestment/NOPAT; net reinvestment = change in working
𝑛→0 𝑛
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VDM model that sets RONIC equal to WACC. This is appropriate because Jackson
is a mature, capital-intensive company in a competitive industry.298 Although there
are significant barriers to entry given the limited availability of spectrum licenses,
this court does not find that this creates a competitive moat that would justify
adjusting RONIC to be greater than WACC.
The first iteration of the model uses Thompson’s VDM model and
Thompson's projections. Using this model, Jackson’s terminal value is
$161,900,000. In present value terms that is $80,498,000. The second iteration of
the model uses Thompson’s VDM model but incorporates Musey’s wireless revenue
𝑔
capital + working capital - depreciation and amortization; g = perpetuity growth rate; =
𝑛
return on invested capital. The Court of Chancery has adopted the assumption that capital
expenditures will equal depreciation in the final period of a perpetual growth model in the
past. See e.g., Cede III, 2003 WL 23700218, at *2 (“I will calculate fixed capital
investment as 1.8% of the following year's net sales, and depreciation as 1.8% of net
sales.”); Merion Cap. L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *27
(Del. Ch. Dec. 16, 2016) (citing ROBERT W. HOLTHAUSEN & MARK E. ZMIJEWSKI,
CORPORATION VALUATION THEORY, EVIDENCE & PRACTICE 232 (2014)). But see, Gilbert
E. Mathews & Arthur H. Rosenbloom, Delaware’s Unwarranted Assumption That Capex
Should Equal Depreciation in a DCF Model, BUS. VALUATION UPDATE, Aug. 2018, at 1
(criticizing the assumption that capital expenditure should equal depreciation as one that
should only be made if growth and inflation are assumed to be zero and stating that the
valuation community increasingly accepts the notion capital expenditures should exceed
depreciation in the estimation of terminal period cashflow). Thus, this court does not find
that a showing of a high implied ROIC using a GGM model is sufficient to demonstrate
that a GGM should not be used because to do so would place significant constraints on the
use of GGMs.
298
JX 227, at 54; Thormann & Rasmussen, supra note 292, at 43 (“[T]he RONIC=WACC
model should not provide very attractive or precise valuations for fast-growing companies
that have not yet matured but might only be suitable for stable and mature firms”).
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projections. In this iteration, Jackson’s terminal value is $259,245,000. In present
value terms that is $128,898,000.
Putting together the above pieces of the DCF, Jackson’s equity value using
Thompson’s projections is $151,510,000, resulting in a per-share value of $9,679.29.
Using Musey’s revenue projections, Jackson’s equity value is $244,660,000
resulting in a per share value is $15,630.23. Considering all relevant factors, the fair
value of Petitioner’s stock as of the valuation is the weighted average of these two
per share fair values—$11,464.57 per-share.
E. Costs and Interest
The appraisal statute permits “[t]he costs of the proceeding [to] be determined
by the Court and taxed upon the parties as the Court deems equitable in the
circumstances.” 8 Del. C. § 262(j). “Customarily, it is the rule of this Court to assess
all costs not specifically allocated by the statute against the surviving corporation,
unless there is a showing of bad faith on the part of the dissenting shareholders.”299
Ramcell obtained an award of fair value that was higher than the merger
consideration. The litigation was hard-fought, but the Petitioner did not engage in
bad faith conduct. Nor is there any indication that Ramcell incurred excessive costs.
299
Charlip v. Lear Siegler, Inc., 1985 WL 11565, at *5 (Del. Ch. July 2, 1985); see,
e.g., Owen v. Cannon, 2015 WL 3819204, at *33 (Del. Ch. June 17, 2015) (awarding costs
as a matter of course)).
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Therefore, any costs to which the petitioner is entitled as the prevailing party will be
paid by Alltel.
Similarly, the court finds no basis to deviate from the presumptive statutory
interest rate on the appraisal award. Accordingly, Petitioner is awarded “interest
from the effective date of the merger . . . through the date of payment of the judgment
[which] shall be compounded quarterly and shall accrue at 5% over the Federal
Reserve discount rate (including any surcharge) as established from time to time
during the period between the effective date of the merger . . . and the date of
payment of the judgment.”300
III. CONCLUSION
The fair value of Jackson stock on the valuation date was $11,464.57 per
share. Ramcell sought appraisal for 155.4309 shares of Jackson’s stock.
Accordingly, Ramcell is awarded $1,781,948.74.
Ramcell is awarded its costs and interest pursuant to the appraisal statute.301
IT IS SO ORDERD
300
8 Del. C. § 262(h).
301
8 Del. C. §§ 262(h), (j).
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