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Hoyd v. Trussway Holdings, LLC

Court of Chancery of Delaware

February 28, 2019


          Submitted: November 12, 2018

          Thomas A. Uebler and Kerry M. Porter, of MCCOLLOM D'EMILIO SMITH UEBLER LLC, Wilmington, Delaware, Attorneys for Petitioner.

          Michael F. Bonkowski, Nicholas J. Brannick, G. David Dean, and Bradley P. Lehman, of COLE SCHOTZ P.C., Wilmington, Delaware, Attorneys for Respondent.



         This is an appraisal action arising from the conversion of a corporation, Trussway Holdings, Inc. ("Trussway") into an LLC via merger. The Petitioner is a former stockholder of Trussway.[1] The parties agree as to the value of the corporate assets and liabilities, with the exception of the value of a wholly-owned subsidiary of Trussway. Valuation of that entity presents a rather straightforward matter of corporate valuation, with a limited set of issues, although those issues have been hotly contested by the parties.[2] I find that a contemporaneous-but-unconsummated sales process provides no meaningful evidence of value, and that the Petitioner's proposed "comparable" companies are not sufficiently comparable to support a valuation; therefore, I rely on a discounted cash flow analysis to determine value, aided by the reports and testimony of the proffered experts. Adding the value of the company's subsidiary to its agreed-to assets and subtracting its agreed-to liabilities, divided by the number of shares outstanding, I find the value of Trussway to be $236.52 per share at the time of the merger. My reasoning follows a brief statement of the facts, below.

         I. BACKGROUND

         A. The Parties

         Petitioner Silver Spur Capital Partners, L.P. ("Silver Spur") and former Petitioner Kendall Hoyd were the only minority stockholders of Trussway Holdings, Inc. Both sought appraisal of their shares. During the course of the litigation, Hoyd and the Respondent reached a settlement, leaving Silver Spur as the sole Petitioner seeking appraisal.[3] On the date of the merger, Highland Select Equity Fund, L.P. owned 577, 796 of the 605, 956 outstanding shares of Trussway, aggregating to 95.35% of the company's stock.[4] Of the roughly 5% of stock remaining, Hoyd owned 13, 432 shares and Silver Spur owned 3, 465 shares.[5]

         Respondent Trussway Holdings, LLC is a Delaware limited liability company with a principal place of business in Houston, Texas.[6] Prior to the merger that prompted the Petitioners here to seek appraisal, the Respondent's predecessor, Trussway Holdings, Inc., had one wholly-owned subsidiary, Trussway Industries, Inc. ("TII").[7] It also owned investments in two companies, Targa and Tandem, which were not publicly traded, and held publicly-traded stock in Building Materials Holding Corporation.[8] The subsidiary, TII, itself had two wholly-owned subsidiaries, Trussway Manufacturing, Inc., and Trussway Construction, Inc.[9]Under this arrangement, TII was the leading manufacturer of pre-fabricated trusses and related components in the multi-family housing market.[10] TII operated six manufacturing facilities in the United States and had approximately 930 employees.[11]

         B. The Merger

         On July 27, 2017, TII engaged Moelis & Company as its investment banker for purposes of a sale of TII.[12] Moelis concluded that TII's enterprise value could range from $202 million to $298 million.[13] Moelis contacted 76 parties, of whom 27 executed non-disclosure agreements and received TII's confidential information presentation.[14] Ultimately, seven parties expressed interest by October 21, 2016.[15]

         In November 2016, TII management conducted presentations with the seven interested parties.[16] Included in the presentation materials were pre-merger projections created by TII management (the "Project Point Projections").[17] These were nine-year projections, from 2017 to 2025.[18] In contrast with less-optimistic, internal management projections made in 2015 and 2016, [19] the Project Point Projections forecasted that TII revenue would be $218.2 million in 2016, that it would grow to $235.9 million in 2017, and that thereafter it would grow anywhere from 2.2% to 14.9% annually, through 2025.[20] Nevertheless, these "numbers were brought down a couple of times, at least once, during the [sales] process because the business wasn't performing as was anticipated."[21]

         The Project Point Projections also included four categories of strategic initiatives; projected costs, revenue, and EBITDA from those initiatives were added to a base case. These initiatives were building a plant in Nevada or Arizona to sell their products to the Las Vegas and Southern California markets;[22] expanding the sale of other products (besides trusses, such as wall panels);[23] expanding the sale of products to the single-family market;[24] and gaining additional market share through sales to new segments, such as senior living, stores and restaurants, hotels and motels, offices, banks, and dormitories.[25] These four initiatives are referred to collectively as "the strategic initiatives." The strategic initiatives had the effect of increasing TII's projected revenue and EBITDA; by 2025, they accounted for 39% of revenue and 43% of EBITDA in the Project Point Projections.[26]

         On December 9, 2016, Trussway's Board of Directors approved an Agreement and Plan of Merger between Trussway and TW Merger Sub, Inc.[27] As a result of this plan, Trussway merged into TW Merger Sub, with Trussway LLC being the surviving entity.[28] In essence, Trussway and its subsidiaries would be transformed from corporations into limited liability companies.[29] On the merger date, each share of Trussway common stock was canceled and converted to common units of Trussway Holdings, LLC (the Respondent here). The Petitioners did not vote in favor of, nor did they consent to, the merger.[30] They subsequently delivered appraisal demands to the Respondent.[31]

         As of the merger date, the sales process for TII was ongoing. On February 27, 2017, Builders FirstSource submitted an offer to purchase TII for "$170 million (on a cash-free, debt-free basis and assuming a normalized level of net working capital at closing)."[32] That offer was withdrawn four days later on March 3, 2017.[33]Moelis's engagement ended in March 2017.[34] No sale of TII has been consummated.

         C. This Litigation

         1. Procedural History

         The Petitioners filed this appraisal action on April 6, 2017.[35] The parties engaged in motion practice over the next fourteen months, with the Petitioners filing motions to compel, which were resolved among the parties. On July 13, 2018, Hoyd and the Respondent arrived at an agreement in principle to settle Hoyd's claim.[36]This left Silver Spur as the only remaining stockholder seeking appraisal. Trial was held on September 6 and 7, 2018. Afterward, the parties submitted post-trial briefing, which concluded on November 12, 2018.

         2. The Parties' Contentions

         Silver Spur claims that each share of Trussway was worth $387.82 per share on the merger date.[37] By contrast, the Respondent contends that the fair value was $225.92 per share.[38]

         Supported by their expert witness, Gregory E. Scheig ("Scheig"), Silver Spur contends that the fair value of Trussway as of the Merger Date was $387.82 per share.[39] To arrive at this figure, Scheig valued TII through a combination of a DCF analysis and two market approaches.[40] He applied 60% weight to his DCF analysis, 30% weight to a comparable companies analysis, and 10% weight to a precedent transaction analysis.[41] Scheig adopted a set of sixteen guideline companies that he deemed comparable for valuation purposes.[42]

         The Respondent submits that Trussway's fair value on the Merger Date was $225.92 per share.[43] Its expert, Professor Jack F. Williams, valued TII via two DCF analyses.[44] Like Scheig, Williams also conducted a Market Approach analysis; however, unlike Scheig, Williams did not apply that analysis to his final valuation.[45]Instead, Williams used a variation of the Income Approach, applying 25% weight to a DCF analysis based on the Project Point Projections, and 75% weight to an alternate DCF analysis, which was based on a manipulated management projection over a five-year period, until 2021.[46]

          The experts' reports differ on several points: (i) how the Project Point Projections should be used and the weight they should be given; (ii) the appropriate beta calculation; (iii) residual value for a DCF analysis; (iv) whether to use a Comparable Companies analysis; (v) whether to use a Precedent Transaction analysis.

         i. The Project Point Projections

         The experts do not dispute that the Project Point Projections are relevant to valuation of Trussway;[47] however, the parties disagree about how the Projections should be used. Silver Spur's expert, Scheig, used the Project Point Projections in his DCF in their entirety, as there was "no reason to doubt that the forecasts provided to it were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of the company."[48] The Respondent, on the other hand, argues that out of the Project Point Projections, only the base-case projections should be considered, and not the four strategic initiatives.[49]Alternatively, the Respondent submits that if the strategic initiatives are included, that greater weight be assigned to the first five years of company projections, as Williams did in his report.[50]

         ii. Beta

         For the most part, the parties' experts agree in their WACC calculations. The exception is in calculation of beta. In his DCF analysis, Scheig used adjusted beta, which gives 2/3 weight to raw beta and 1/3 weight to a mean beta of 1.0.[51] Williams used raw beta, which "measures data purely from a historical returns perspective."[52]

         Moreover, there are various methods by which beta can be "unlevered" and "relevered." While similar in nature, these methods use different inputs. In his DCF analysis, Scheig used the Hamada method to unlever and relever beta, whereas Williams used the Harris-Pringle method. Both approaches are similar in their assumptions of the value of the company's assets to its debt and equity; however, the methodologies differ in their respective treatment of debt.[53] In the end, these differing treatments can lead to notably disparate beta calculations.

         As a result of these differences, Scheig derived a WACC of 13.4%, [54] while Williams derived a WACC of 15.4%.[55]

          iii. Residual Value

         Two methods for computing terminal value are the Exit Multiples Model and the Growth in Perpetuity Model. Scheig used both models. He employed the Exit Multiples Approach, averaging the residual value of Trussway derived from a Gordon Growth Model, and the residual value of Trussway derived from using an EBITDA exit multiple of 7x.[56] With this method, Scheig derived an average residual value of $453 million, discounted to a present value of $155.6 million on the Merger Date.[57]

         The Respondent contends that using an Exit Multiple Approach improperly augmented Scheig's residual value.[58] Per the Respondent, only the Gordon Growth Model should be used to determine residual value.[59] Williams used this model, with a 2.3% growth rate.[60] In turn, Silver Spur argues that this figure is too low, considering Trussway's projected growth and the fact that a 2.3% growth rate "is equal to expected inflation and thus reflects an assumption that Trussway [] would not grow in excess of inflation . . . ."[61]

         iv. Comparable Companies Analysis

         The parties disagree on whether a Comparable Companies Analysis should be used. This Analysis accounted for 30% of Scheig's valuation. After selecting sixteen comparable companies, Scheig calculated their historical profitability and the enterprise value to EBITDA multiples.[62] He used a 9.8x multiple, which Silver Spur contends is conservative.[63] He derived an implied enterprise value of $242.3 million.[64] He then added $7.6 million cash and subtracted $62.6 million debt, to arrive at an equity value of $187.3 million on a minority, marketable interest basis. Next, Scheig applied a 25% control premium.[65]

         Conversely, the Respondent contends that there are no truly comparable companies, and thus, such analysis is unwarranted. Per the Respondent, "TII is a unique asset given its nearly exclusive focus on the multi-family market."[66]Furthermore, the Respondent argues that a 25% control premium is improper and is not grounded in authority.[67]

         v. Precedent Transaction Analysis

         The parties also disagree on whether to use a Precedent Transaction Analysis. This Analysis accounted for 10% of Scheig's valuation. He observed data from five transactions in the S&P Capital IQ database, from 2015 forward, where the target was in the building materials or truss industry.[68] Scheig determined that one transaction could provide a reliable indication of Trussway's value; that transaction had an EBITDA multiple of 9.9x.[69] Ultimately, after applying that 9.9x multiple to Trussway's EBITDA, adding cash, and subtracting debt, Scheig derived an implied equity value of $212.3 million.[70] However, per Silver Spur, because there was just one reliable transaction, Scheig chose to assign this precedent transaction analysis only 10% weight.[71]

         The Respondent posits that using only one company is insufficient for a reliable precedent transaction analysis.[72] For that reason, it argues the analysis should have no weight in this valuation.[73]

         II. ANALYSIS

         A. Legal Standard

         Statutory appraisal is a right provided to shareholders who dissent from a merger on the grounds that the offering price is inadequate.[74] After a shareholder seeks appraisal, the Court determines the fair value of the shares as of the merger date.[75] Because Silver Spur has perfected its appraisal right as required by Section 262, [76] it is entitled to have the Court determine the intrinsic value of its shares as on the Merger Date.[77]

         "In a statutory appraisal proceeding, both sides have the burden of proving their respective valuation positions by a preponderance of the evidence."[78] The Court determines "the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value."[79] In making that determination, the Court "should first envisage the entire pre-merger company as a 'going concern,' as a standalone entity, and assess its value as such."[80] Section 262 requires the Court to perform an independent examination of fair value at the time of a transaction, and it vests with the Court the discretion to consider "all relevant factors" and determine the going concern value of the subject company.[81] Furthermore, this Court may consider "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court . . . ."[82]

         B. The Comparable Companies Analysis and Valuation Derived from the TII Sales Process

         As discussed above, in his valuation of Trussway, Silver Spur's expert, Scheig, in addition to a DCF, used a Comparable Companies Analysis and a Precedent Transaction Analysis in his valuation, assigning each valuation 30% and 10% weight, respectively. TII is a private company whose business has focused substantially on building trusses for the multi-family housing market. I agree with the Respondent that Scheig's supposed "comparable companies" are too divergent from TII, in terms of size, public status, and products, to form ...

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