HUFF FUND INVESTMENT PARTNERSHIP d/b/a MUSASHIII LTD, and BRYAN E. BLOOM, Petitioners,
CKx, INC., Respondent.
Submitted: August 26, 2013.
Samuel T. Hirzel, II and Dawn Kurtz Crompton, of PROCTOR HEYMAN LLP, Wilmington, Delaware; OF COUNSEL: Lawrence M. Rolnick, Steven M. Hecht, Thomas E. Redburn, Jr., Marc B. Kramer, Michael J. Hampson, of LOWENSTEIN SANDLER LLP, Roseland, NJ, Attorneys for Petitioners.
Stephen P. Lamb and Justin A. Shuler, of PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; OF COUNSEL: Lewis R. Clayton, Gary R. Carney, and Geoffrey R. Chepiga, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York, Attorneys for Respondent.
GLASSCOCK, Vice Chancellor.
This matter requires me to perform a statutory appraisal to determine the "fair value" of the stock of CKx, Inc. What is the fair value of an asset? For a simple asset—a piece of real property, for instance—it is the market value. If a trustee were to sell property held in trust, such a sale could be challenged by the beneficiary on a number of grounds. It would be odd, however, if the sale were an arms-length, disinterested transaction after an adequate market canvas and auction, yet the challenge was that the price received did not represent "fair" value. It would be odder still if the beneficiary presented as evidence of this proposition a post-sale appraisal, relying on speculative future income from the property not currently being realized, and stating that, notwithstanding the sales price, the true value was more than twice that received; and if the trustee's rebuttal involved a second post-facto appraisal indicating that the sales price was higher than the fair value of the parcel. In such a case, the appraisals would be viewed by this Court, not as some Platonic ideal of "true value, " but as estimates—educated guesses—as to what price could be achieved by exposing the property to the market. A law-trained judge would have scant grounds to substitute his own appraisal for those of the real-estate valuation experts, and would have no reason to second-guess the market price absent demonstration of self-dealing or a flawed sales process.
I am faced with a similar situation in this much more complex venue of the sale of a corporate enterprise. The Petitioners are stockholders in a corporation, CKx, who have opted for appraisal rather than the cash-out price received in the sale of CKx to an acquirer. The sales process here has been challenged, reviewed and found free of fiduciary and process irregularities. The company was sold after a full market canvas and auction. Under our appraisal statute, I am to determine the fair value of the shares as a going concern. The parties have submitted expert valuations of the company, ranging from an amount below the sales price (submitted by the Respondents) to more than twice the sales price (submitted by the Petitioners). Our statute and the interpreting case law direct that I not rely presumptively on the price achieved by exposing the company to the market. I must evaluate "all relevant factors, " and arrive at a going-concern value inclusive of any assets not properly accounted for in the sale, but exclusive of synergy value that may have been captured by the seller. In part, this directive represents the greater complexity in valuing, marketing and selling an ongoing corporate enterprise, in contrast to the simple sale of an asset, such as a parcel of real estate. Typically, therefore, this Court has relied on expert valuation, such as those employing discounted cash flow and comparable company analyses, to determine statutory fair value. Even so, market value—where reliably derived—remains among the "relevant factors" for arriving at fair value. In this particular case, CKx presents significant and atypical valuation challenges, for the reasons I describe below. In particular, the unpredictable nature of the income stream from the company's primary asset renders the apparent precision of the expert witnesses' cash flow valuation illusory. Because neither party has presented a reasonable alternative valuation method, and because I find the sales price here a reliable indicator of value, I find that a use of the merger price to determine fair value is appropriate in this matter.
A. History of the Enterprise
Prior to the CKx-Apollo merger, CKx was publically traded on NASDAQ. CKx was formed by Robert F.X. Sillerman, a businessman with experience in managing and investing in media and entertainment companies, including radio, concert promotion, sports management, and television. When CKx and Apollo merged, Sillerman was the company's largest stockholder, owning 20.6% of the company. Sillerman created CKx to own and manage iconic entertainment properties. CKx's business strategy arose from the premise that the ever-increasing number of entertainment distribution channels—including computer, smartphone, tablet, and television—would lead to an ever-increasing demand for original content. Sillerman and CKx management believed that technology would result in consumers focusing less on the distribution channel and more on the content they were interested in, thereby allowing content owners to reap increasing returns.
In pursuit of this strategy, CKx focused on acquiring the rights to iconic entertainment properties. As of 2010, CKx's most significant assets were: (1) 19 Entertainment, which owned rights to the number-one-rated television show, the singing competition American Idol,  as well as the successful competitive dance show So You Think You Can Dance ("Dance"); (2) Elvis Presley Enterprises, which owned the rights to the name, image, and likeness of entertainer Elvis Presley, as well as some rights to Presley's recorded music catalog; and (3) Muhammad Ali Enterprises, which owned the name, likeness, and image of the boxing champion. Though CKx also owned other assets, these three, and particularly American Idol, were by far the most valuable. In fact, American Idol and its related assets were responsible for approximately 60-75% of CKx's cash flow.
B. CKx 's Business as of the Merger Date
CKx's principle challenge was how to deal with the maturation of the American Idol franchise. From its peak in 2006 until the time of the merger in 2011, American Idol had suffered five seasons of declining ratings. During that period, American Idol's Nielsen ratings fell by almost 50% among the lucrative 18-49 demographic. American Idol also faced increasing competition from other reality shows featuring musical competition. Particularly problematic in the summer of 2011 was the looming threat of the talent-competition show X-Factor. X-Factor was the brainchild of former American Idol "judge" and prominent personality, Simon Cowell. Cowell's success with a show similar to X-Factor in the United Kingdom suggested that his show could pose a serious threat to American Idol.
Compounding the economic uncertainty was the pending expiration of the contract between American IdoPs network distributor, Fox, and 19 Entertainment. At the time of the merger, the agreement between 19 Entertainment and Fox was set to expire, and the parties had not yet agreed to a new contract. The key area of disagreement was the amount of fixed licensing fees that Fox would pay for the right to broadcast the show. Although American Idol was one of Fox's most popular, and most profitable, shows, CKx's negotiation leverage was limited. Because Fox held a perpetual license to renew its exclusive contract to broadcast American Idol, CKx could not threaten to shop the show to an alternative network. The Respondent contends that CKx's only practical leverage was that if Fox exercised its option to renew the American Idol contract, CKx could refuse to produce programming in excess of 37 hours for a given season. American Idol had been producing over 50 hours of programming in the most recent seasons. In other words, CKx could extract meaningful concessions from Fox only if it could convince Fox that CKx was willing to cut off its nose to spite its face. In addition to the uncertainties surrounding American Idol's prospects for future growth, Dance—which had always been a much less popular show than American Idol— also faced declining ratings.
However, notwithstanding the declining ratings for CKx's two most popular television programs, other developments in the television marketplace suggested that both programs, especially American Idol, could continue to generate significant revenue for CKx. The network television industry has been experiencing declining ratings but increasing advertising revenue for many years. Accordingly, for any particular program, an absolute ratings decline could be offset by an increase in a show's relative market share. At the time of the merger, American Idol remained the number one show on television. The Petitioners argue that as fewer and fewer shows attract the type of mass audience enjoyed by American Idol, the program's value could actually increase, notwithstanding its declining ratings. At least one member of CKx management held that view at the time of the merger.
C. Sales Process
In 2007, CKx's prospects were bright enough that Sillerman himself sought to buy out the public shareholders at a price of $13.75 per share. However, his bid failed as "the recent deterioration of credit conditions in the overall market had made it uneconomic to execute the financing." Perhaps because the collapse of the Sillerman buyout was caused by factors outside the parties' control, CKx management and the market at large believed that a sale of the company was imminent. As a result, CKx executed eight confidentiality agreements with both strategic and private equity bidders asserting some interest in the company.
The Petitioners contend that between 2008 and 2011, the possible sale of CKx disrupted the company's acquisition strategy. Despite the confidentiality agreements, no proposals had arisen out of Sillerman's bid, which in itself had unproductively lengthened the sales process by sixteen months. As a result, the Board "concluded that ongoing sale discussions were likely to be unproductive and disruptive . . ., " CKx CFO Tom Benson's testimony confirmed that management viewed the process as "unproductive" and "disruptive" as well, testifying that he had discussed with director Bryan Bloom the fact that prospective acquisition targets had been reluctant to sell to CKx because of "the questions regarding the future ownership of the company." After concluding that a possible sale was harming its business, CKx made a public announcement in October 2010 that "it was no longer discussing a potential sale of the Company or of a controlling stake in the Company." By taking down the figurative "for sale" sign and refocusing on its strategy of acquiring and developing valuable entertainment content, CKx hoped to overcome its recent inability to make valuable acquisitions.
In May of 2011, just one month before consummating the merger with Apollo, CKx began exploring a purchase of Sharp Entertainment, a television production company that focused on reality and event-based programming and was expected to generate about $11 million in operating income in 2011, roughly double its 2010 earnings. Sharp had produced several popular reality shows, including the Travel Channel's Man v. Food, the highest rated program in channel history. Sharp employed 160 people, most of whom were responsible for producing and editing the more than thirty television shows in the company's portfolio. Benson testified that CKx was involved in "advanced discussions over price and terms" before the Apollo transaction closed.
The Sharp acquisition was not the only business opportunity that CKx developed after announcing its intentions to forgo a sale of the company. CKx's announcement that it was no longer for sale had the ironic—but perhaps not unintended—consequence of eliciting renewed interest from private equity funds looking to purchase CKx. Among the newly interested bidders were Apollo, the Gores Group ("Gores"), and Prometheus/Guggenheim ("Guggenheim"). On March 18, 2011, Gores and financial sponsor "Party B" offered to purchase CKx for $4.75 per share. On March 21, 2011, Guggenheim and financial sponsor "Party C" proposed an offer price of $4.50 per share. Then, on March 23, 2011, Apollo offered $5.00 per share. After receiving these offers, the Board considered its options and decided to again pursue a sale of the company, but to do so expeditiously in an attempt to avoid sending negative signals to the market or to distract CKx management. The Board retained Gleacher as its financial advisor, since Gleacher had assisted the company during Sillerman's attempted buyout in 2007. Gleacher would receive a success fee of $4 million on the successful completion of a transaction.
The Board directed Gleacher to run an auction among the interested buyers as well as solicit interest from third parties. Interested bidders would be given three weeks to conduct due diligence and negotiate a transaction. The three parties who had already submitted bids were told that they were required to submit their final, fully-funded and committed offers by May 6, 2013. On April 18, 2013, Gleacher reached out to other potential bidders,  including three prospective financial buyers and nine strategic acquirers. As a result, two financial buyers (and no strategic buyers) expressed interest by signing confidentiality agreements.
On April 27, 2013, the Board met to discuss the status of the negotiations with the various bidders. Gleacher informed the Board that Apollo and Party B were the only bidders that had conducted any due diligence, and that the two prospective financial bidders who had signed confidentiality agreements were no longer interested in conducting due diligence or pursuing an acquisition of CKx. Gleacher also informed the Board that neither of the two remaining interested bidders had raised their offer price above the initial non-binding bids. To incentivize Gleacher to solicit bids exceeding $5.50 per share, the CKx Board modified the terms of Gleacher's engagement letter so as to provide for additional compensation if the merger price were to exceed $5.50 per share. In addition, Sillerman spoke with both Apollo and Party B to express his support of each party's proposed transaction.
Ultimately, Apollo submitted a bid to purchase CKx for $5.50 per share, and Party B submitted a bid for $5.60 per share. Despite the marginally lower price, the Board ultimately selected the Apollo bid because Party B's financing was uncertain,  and because the Apollo bid granted CKx the right to seek specific performance in certain instances, while the Party B bid lacked any such right.Gleacher opined that the Apollo transaction represented a fair price to CKx stockholders, and the CKx Board accepted Apollo's bid. Bryan Bloom was the only director who dissented. Although class action litigation was ...