CKX Sale Price, Not Cash Flow, Is Proper Valuation

Bryan E. Bloom, a CKX director who dissented on the sale, and Huff Fund Investment Partnership, an investment entity that also owned shares in CKX, filed a motion seeking the appraisal of the company's stock under Title 8, '262 of the Delaware General Corporation Law, which gives the court the authority to determine fair value. These petitioners alleged that members of CKX's board had not properly characterized the nature of contract extension negotiations between CKX and Fox, the network distributor of American Idol.

The appraisal petition alleged that CKX could obtain increased economic benefits from Fox, therefore increasing the company's value. An expert witness for the petitioners claimed that under a discounted cash flow (DCF) valuation model, CKX's stock was worth $11.02 per share. However, CKX's expert witness' DCF analysis valued the company at $4.41 per share.

Though the Delaware Chancery Court typically relies on a DCF model to evaluate a corporation, Glasscock concluded that in this case a DCF valuation was unreliable because no one could accurately predict the outcome of CKX's negotiations with Fox. The Vice Chancellor thus found: “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 [Apollo/CKX] merger price to determine fair value is appropriate in this matter.”

“The result of the Fox contract negotiations would be a one-time, unpredictable, irreversible, and immitigable increase or decrease in the fixed licensing fee,” Glasscock noted. “Unlike normal projections, which involve some level of uncertainty, here, management attempted to account for a single superseding event beyond the company's control involving idiosyncratic actors making decisions that would have a large effect on the company's future value.”

The court compared the CKX case to the Chancery Court decision Doft & Co. v. Travelocity.com, 19734 (Del. Ch. 2004). In Travelocity.com, the Chancery Court rejected the DCF analysis because at the time of the transaction, Travelocity's management projections arose from the unpredictability of a travel company's financial performance in the wake of the 9/11 attacks. In CKX, the Vice Chancellor emphasized that similar uncertainty made it difficult to predict American Idol revenues.

“The future revenue streams generated by 'American Idol' when the merger took place were in a state of flux,” Glasscock wrote. “Initial internal estimates of those revenues were markedly lower than projections provided to potential buyers and lenders.”

Because of the uncertainty, the court said that the merger price of $5.50 per share was the most accurate evaluation because it was the price that resulted from an effective market check and was negotiated at an arm's length without any violations of fiduciary duties.

“Having concluded that our law recognizes merger price as an acceptable factor that I may consider in conducting my appraisal of CKX, I also find that the evidence demonstrates in this case, where no comparable companies, comparable transactions, or reliable cash-flow projections exist, that the merger price is the most reliable indicator of value,” the Vice Chancellor decided. “The record and trial testimony support a conclusion that the process by which CKX was marketed to potential buyers was thorough, effective, and free from any spectre of self-interest or disloyalty.”

Jeff Mordock is a Reporter for Delaware Business Court Insider, an ALM sibling of Entertainment Law & Finance.

Television ratings go up and down, even for the most successful programs. This complicates how to value a production company's worth if that company is sold. Delaware Court of Chancery Vice Chancellor Sam Glasscock III, breaking from that court's tradition of using discounted cash flow to determine a company's value, has ruled that the $509 million sale price for entertainment content provider CKX Inc. was the most relevant available evaluation method because no comparable transactions or reliable cash-flow projections existed. Huff Fund Investment Partnership v. CKX Inc., 6844.

CKX (today known as CORE Media Group), a Delaware corporation headquartered in New York, has owned the rights to several top entertainment properties, including 80% of the image rights to Muhammad Ali and 85% of the rights to the name, image and likeness of Elvis Presley and the operations of Graceland. (In November 2013, Authentic Brands Group purchased the Elvis Presley properties.) The company also owns an entertainment agency that represents celebrities such as Robin Williams, Billy Crystal and Woody Allen. Most importantly, it owns the majority of the rights to the television programs American Idol, So You Think You Can Dance and Pop Idol, the British counterpart to American Idol . According to court papers in the case over valuation of the company, American Idol was CKX's most valuable property, at one point accounting for 60% to 75% of CKX's cash flow. The program was also Fox Network's top-rated show, though ratings had declined.

After CKX was put up for sale, an affiliate of Apollo Global Management LLC submitted a bid to purchase the company for $5.50 per share, while a second suitor, identified in court documents as Party B, offered a $5.60 per share purchase price. Although Party B offered the higher purchase price, CKX's board selected the Apollo offer because its financing was more secure.

Bryan E. Bloom, a CKX director who dissented on the sale, and Huff Fund Investment Partnership, an investment entity that also owned shares in CKX, filed a motion seeking the appraisal of the company's stock under Title 8, '262 of the Delaware General Corporation Law, which gives the court the authority to determine fair value. These petitioners alleged that members of CKX's board had not properly characterized the nature of contract extension negotiations between CKX and Fox, the network distributor of American Idol.

The appraisal petition alleged that CKX could obtain increased economic benefits from Fox, therefore increasing the company's value. An expert witness for the petitioners claimed that under a discounted cash flow (DCF) valuation model, CKX's stock was worth $11.02 per share. However, CKX's expert witness' DCF analysis valued the company at $4.41 per share.

Though the Delaware Chancery Court typically relies on a DCF model to evaluate a corporation, Glasscock concluded that in this case a DCF valuation was unreliable because no one could accurately predict the outcome of CKX's negotiations with Fox. The Vice Chancellor thus found: “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 [Apollo/CKX] merger price to determine fair value is appropriate in this matter.”

“The result of the Fox contract negotiations would be a one-time, unpredictable, irreversible, and immitigable increase or decrease in the fixed licensing fee,” Glasscock noted. “Unlike normal projections, which involve some level of uncertainty, here, management attempted to account for a single superseding event beyond the company's control involving idiosyncratic actors making decisions that would have a large effect on the company's future value.”

The court compared the CKX case to the Chancery Court decision Doft & Co. v. Travelocity.com, 19734 (Del. Ch. 2004). In Travelocity.com, the Chancery Court rejected the DCF analysis because at the time of the transaction, Travelocity's management projections arose from the unpredictability of a travel company's financial performance in the wake of the 9/11 attacks. In CKX, the Vice Chancellor emphasized that similar uncertainty made it difficult to predict American Idol revenues.

“The future revenue streams generated by 'American Idol' when the merger took place were in a state of flux,” Glasscock wrote. “Initial internal estimates of those revenues were markedly lower than projections provided to potential buyers and lenders.”

Because of the uncertainty, the court said that the merger price of $5.50 per share was the most accurate evaluation because it was the price that resulted from an effective market check and was negotiated at an arm's length without any violations of fiduciary duties.

“Having concluded that our law recognizes merger price as an acceptable factor that I may consider in conducting my appraisal of CKX, I also find that the evidence demonstrates in this case, where no comparable companies, comparable transactions, or reliable cash-flow projections exist, that the merger price is the most reliable indicator of value,” the Vice Chancellor decided. “The record and trial testimony support a conclusion that the process by which CKX was marketed to potential buyers was thorough, effective, and free from any spectre of self-interest or disloyalty.”

Jeff Mordock is a Reporter for Delaware Business Court Insider, an ALM sibling of Entertainment Law & Finance.