Ramcell, Inc. v. Alltel: DE Court averages valuation models to arrive at fair market value of shares

Jackson Cellular Telephone Co. (Jackson) provided wireless communications products and services in the FCC designated Jackson Metropolitan Statistical Area (MSA), centered around Jackson, Mississippi. In 2009, Verizon Communications, Inc. (Verizon) acquired Jackson’s majority owner Alltel, and combined Jackson’s operations with its own.

In April 2019, Alltel, then owner of 90% of the outstanding common stock of Jackson, effected a short-form merger in which holders of Jackson stock received US$2,963 per share. Ramcell, the holder of less than a 1% interest in Jackson, did not consent to the merger. On August 5, 2019 Ramcell exercised its appraisal rights under 8 Del. C. § 262, seeking a statutory appraisal for its 155.4309 shares of Jackson’s stock.

At trial, both Alltel and Ramcell presented expert testimony as to the fair value of Jackson as of April 4, 2019. While both parties’ experts agreed the proper methodology to measure the value of the company was a discounted cash flow (DCF) model, the experts arrived at “vastly different valuations” of the company: US$5,690.92 according to Alltel, and as much as $36,016 according to Ramcell.

Rather than adopting one expert’s valuation, the court determined that the best way of calculating fair market value was to blend the approaches of the two experts. The court noted that there were three basic components to a DCF model: (1) Future Cash Flow Estimates, (2) the Discount Rate, and (3) Terminal Value. 

For the Future Cash Flow component, the court found that “[n]either party persuasively established that the projections used in their DCF model were reliable.” As a result, the court averaged the two sets of projections, giving Alltel’s a weight of 70% and Ramcell’s a weight of 30%. This allocation reflected the Court’s greater confidence in Alltel’s use of concrete historical financials while accounting for drawbacks in Ramcell’s approach of calculating subscriber numbers.

For the Discount Rate, the court criticized each expert’s approach, noting Ramcell’s expert “simply assumed” Jackson’s rate was the same as Verizon’s 6.8% and Alltel’s expert’s selection of data for his model “did not inspire confidence in his approach” and his  resulting 12.9% rate. The court again turned to a blended approach and arrived at a figure of 7.847% using a combination of both experts’ figures.

For Terminal Value – the present value of all the company’s future cash flows beginning after the projection period – the court sided with Ramcell’s expert, who persuasively presented averages of industry growth forecasts with discounts for Jackson MSA-specific characteristics. But, due to some inaccuracies with the data used by Ramcell’s expert, the court adjusted the growth rate downward slightly to 2.2%.

Putting together these three components, the court calculated a final weighted average of US$11,464.57 per share, for a total judgment of US$1,781,948.74. Because the court’s final price was greater than the merger price, the court found that the default rule of awarding costs to the surviving corporation should be followed, and thus ordered that Alltel pay costs and fees to Ramcell.

Authored by Allison Wuertz and Jason Chohonis.