Case Update - November 2010
provided by BV Resources | Sherrye Henry, editor email@example.com___________________________________________________________________________________________________________________
WaveDivision Holdings, Inc. v. Millennium Digital Media Systems, LLC, 2010 WL 3706624 (Del. Ch.)(Sept. 17, 2010)
There may be a strong perception among ASA BV members that the Delaware Chancery Court preers a discounted cash ow analy-sis to other valuation methods, especially when assessing air value in statutory appraisal actions. Certainly, the deendant in thiscase argued that a DCF analysis was “standard.” In this breach o contract action, however, the court ocuses less on a particularvaluation method than whether it fts the applicable law and acts o the case.
Troubled cable company engages in ‘stealth’ fnancing.
For fve years ollowing the 2000 burst o the telecomm bubble, Millen-nium Digital Media Systems tried to keep its cable operations aoat in an increasingly competitive industry. Ater several ailedrefnancing attempts, in 2006 it agreed to sell its Michigan and Pacifc Northwest holdings to WaveDivision Holdings LLC or $157million. The parties’ agreements included an express “no-shop” provision, but the day ater signing, Millennium began looking orrefnancing alternatives, led by its unsecured creditors, primarily several private equity unds that held high-yield, increasing ratenotes (IRN note holders).As unsecured creditors, the IRN note holders would receive no pay-o rom the Wave sale and would have to depend on the com-pany’s remaining assets or any uture return. Some o them also held seats on Millennium’s management committee, the sameone that approved the sale to Wave. Thus, at the same time Millennium was pushing ahead with the Wave transaction, it was alsopursuing a parallel path with the IRN note holders, even retaining an outside consultant to develop an refnancing plan and generat-ing projections to estimate its aects.Its “stealth” eorts paid o: In July 2006, Millennium signed a restructuring agreement with the IRN note holders that eectivelytranserred control o the company to its ormer creditors. That same day, Millennium terminated its agreement with Wave, whichsued or breach o contract. Following the terminated sale, Wave also purchased two cable systems or approximately $147 million.Based on the acts and applicable law, the Delaware Chancery Court, in an opinion by Vice Chancellor Strine, ound that Millenniumhad breached its agreements with Wave. The proper measure o damages was to put Wave “in as good a position as [it] would havebeen had Millennium not breached,” or the value it expected to realize rom the agreements minus any avoided costs (most obvi-ously, the contract price), and minus any mitigation (the post-breach purchase o the two cable systems).
Both parties retain top guns.
The deendant Millennium argued that by terminating the sale o the cable systems, it did the plainti Wave a avor, and thus no damages were due. The plainti claimed the systems’ value would have grown substantially under itsstewardship, in excess o $85 million. Both parties retained the managers o national valuation practices as experts to prove theirdisparate claims.In particular, the plainti’s expert used a multiple o EBITDA analysis to estimate the plainti’s net loss. He reviewed two o theplainti’s recent (2005 to 2008) acquisitions o cable companies, deriving an implied valuation multiple o 8.8. To determine
DE CHANCERY REJECTS DCF ANALYSIS AS ‘STANDARD‘NOVEMBER 10, 2010