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Court finds Petsmart buyout fair in blow to appraisal strategy | Reuters

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Court finds Petsmart buyout fair in blow to appraisal strategy

Fri May 26, 2017 | 4:22 PM EDT

By Tom Hals | WILMINGTON, Del.

May 26 Private equity firms paid fair value for PetSmart Inc when they
bought the retailer for $8.7 billion in 2015, a Delaware judge ruled on
Friday, dealing a blow to hedge funds that try to wring cash from merger
deals through a strategy known as appraisal.

BC Partners Inc led a consortium of private equity investors that acquired
PetSmart for $83 per share, but a group of hedge funds argued in a Delaware
court during a four-day trial the price should have been $128.78 per share.

Delaware Vice Chancellor Joseph Slights rejected the hedge funds' analysis
and said he could not find a way to determine any price other than the deal
price was fair value.

Stuart Grant, who represented the hedge funds, did not immediately respond
to a request for comment. PetSmart said it was pleased with the ruling.

Appraisal is meant to protect investors who oppose a buyout by allowing
them to ask a judge to determine fair value of a stock. Friday's ruling is
likely to please some Wall Street lawyers who have criticized appraisal as
little more than a hold-up tactic.

"If anyone had a gold rush mentality with appraisal rights, the court has
shown them that's not warranted," said Minor Myers, a professor at Brooklyn
Law School. "The court will still be there in the right case, but this is
not a broken ATM."

Hedge funds, including ones affiliated with Farallon Capital Management and
Muirfield Capital Management, sought to have 10.7 million shares of
PetSmart appraised after the buyout closed. That made PetSmart one of
largest appraisal cases, worth hundreds of millions of dollars, and
followed high-profile cases over the sale of Dell Inc, BMC Software and DFC
Global Corp.

Deal price was determined to be the fair value in BMC, but in the other two
cases hedge funds got a bump in price.

Slights seemed to push back against the ruling in Dell by Vice Chancellor
Travis Laster, who suggested that private equity buyers were less likely to
pay a fair value because their investment was premised on large returns.

"And while it is true that private equity firms construct their bids with
desired returns in mind, it does not follow that a private equity firm's
final offer at the end of a robust and competitive auction cannot
ultimately be the best indicator of fair value for the company," Slights
wrote in a 109-page opinion. (Reporting by Tom Hals; Editing by Sandra
Maler)


Eric D. Schwerin
eschwerin@rosemontseneca.com

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