In re Appraisal of Panera Bread Co.- Dissenters’ stock valued at deal price less synergies

Once again, a Delaware court has turned to deal price as the most reliable indicator of a company’s fair value in a statutory appraisal proceeding. Interestingly, the dissenting shareholders received the unadjusted fair value of their shares, even though the Delaware Chancery Court found that a downward adjustment for cost- and tax-related “synergies” was justified.

Valuation dispute

Panera Bread is a national bakery-cafe chain in the United States and Canada. JAB Holdings B.V. purchased Panera in July 2017 for $315 per share. After the acquisition, dissenting shareholders with about 785,000 shares of the company’s common stock demanded an appraisal of their shares.

The shareholders’ business valuation expert concluded that the fair value was $361 per share. The expert arrived at this figure by giving 60% weight to a discounted cash flow model, 30% weight to an analysis of comparable companies and no weight to analyses of prior transactions involving the company’s stock. He also gave no weight to the deal price.

During trial, Panera’s valuation expert countered that the fair value was $304.44 per share, based on deal price less synergies. In post-trial briefing, that value was reduced to $293.44. The company sought a refund for the difference between its prepayment of $315 per share and the fair value.

Court decision

The chancery court began its analysis by noting that the Delaware Supreme Court has endorsed the position that the deal price often is the most reliable evidence of fair value. That said, the state high court has acknowledged that the market isn’t always the best indicator, stating that, “the persuasiveness of the deal price depends on the reliability of the sale process that generated it.” If the process isn’t open or sufficiently reliable, the deal price isn’t persuasive.

The chancery court found the following objective indicia of the Panera sale process’s reliability:

  • It was an arm’s-length transaction.
  • The board of directors was disinterested and independent.
  • The buyer based its assessment of Panera’s value on the company’s extensive public information and focused due diligence on its confidential information.
  • Panera’s board was able to extract two price increases from the buyer.
  • No other potential bidders emerged, despite a leak during negotiations.
  • Panera solicited all logical buyers (that is, JAB and Starbucks), consistent with its knowledge of the company’s value and the market.

The court noted some flaws in the sales process, however. For example, Panera’s founder and CEO pushed for an offer “not deep in the 300s” before the board received a full valuation. In addition, the board’s financial advisor had previously worked for the buyer. Ultimately, the court determined that such weaknesses didn’t undermine the indicia of reliability.

Deduction for synergies

Next, the chancery court considered the synergies produced by the transaction. The court explained that it must exclude from any appraisal award the amount of value the shareholders would receive because the buyer intends to operate the company as part of a larger enterprise that can produce synergistic gains.

The company cited three categories of synergies: 1) incremental cost savings, 2) incremental leverage tax benefits, and 3) revenue synergies. The shareholders asserted that JAB was a financial sponsor, not a strategic buyer, and challenged the company’s evidence of synergies.

The court sided partially with Panera. It found that the company established a deduction from the deal price for cost and tax synergies of $11.56 per share. But it also concluded that the company failed to prove its $10 adjustment for revenue synergies. As a result, the court found that the fair value per share was $303.44 after adjusting for synergies ($315 – $11.56).

Refund denied

The deductions for synergies weren’t particularly relevant, however, because the company had prepaid its shareholders the entire deal price. The parties didn’t agree to a clawback provision in the event of overpayment, and the Delaware appraisal statute doesn’t explicitly include a refund mechanism. The court, therefore, declined to order a refund, leaving the shareholders with more than fair value.

3 alternative methods come up short

The Delaware Chancery Court in Panera (see main article) considered — but ultimately rejected — the following three alternative sources of valuation evidence:

1. Discounted cash flow (DCF) analysis. The chancery court found flaws with both experts’ DCF analyses. The court noted that the Delaware Supreme Court has cautioned against using the DCF method when market-based indicators are available. It concluded that neither DCF valuation was sufficiently reliable compared to the reliable market-based deal price.

2. Guideline company data. Both experts analyzed comparable (guideline) companies, but the chancery court found that neither analysis established a suitable peer group for comparison. In fact, the court found both analyses merely to be attempts to corroborate the parties’ respective preferred valuations.

3. Prior transactions involving the company’s stock. The court dismissed the experts’ analyses of precedent transactions. The shareholders’ expert used data from three earlier transactions, while the company’s expert reviewed 11 previous transactions. However, the court determined that neither sample size was reliable enough to afford it weight.

If a valuation expert chooses not to use alternative sources as a primary valuation method, they may still serve as a “reasonableness check” to help justify the value determined by the primary method.

In re Appraisal of Panera Bread Co., No. 2017-0593-MTZ (Del. Ch. Jan. 30, 2020)

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