IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE: APPRAISAL OF JARDEN CORPORATION :
:
:
: CONSOLIDATED C .A. No. 12456

- VCS

ORDER

On this 16 th day of September , 2019, upon consideration of Petitioners’
Motion for Reargument (the “Motion”) and the Respondent’s O pposition to

Petitioner’s Motion for Reargument (the “Response”) , it appears that:

1. On July 19, 2019, the Court issued its post

- trial opinion in this appra isal

action (the “Opinion”) in which the Court appraised the fair value of Jarden
Corporation at the time of its merger with Newell Rubbermaid, Inc. at $48.31 per
share. I based that appraisal on Jarden’s U naffected Market P rice (as defined in the
Opinion )

. 1 I also determined that this fair value determination w a s corroborated by :
(i) other market evidence, including a pre

- merger Jarden stock offering at $49.00

per share ; (ii) my independent discounted cash flow (“DCF”) analysis, which
yielded a value for Jarden of $48.13 per share ; and (iii) to a lesser degree
, Respondent’s merger

- price

- less

- synergies analysis, which yielded a value of $46.21

per share. These valuation measures stood in contrast to Petitioner’s proffered fair

1 In re Appraisal of Jarden Corp.
, Consol. C.A. No. 12456 (Del. Ch. July 19, 2019) (“Op. ” ).2

value of $71.35 per share ba sed on a comparable companies analysis, which I
rejected as incredible for reasons stated in the Opinion.

2. In the Motion, Petitioner’s argue that my DCF analysis does not
corroborate my fair value determination because the DCF results were the product

o f certain structural and mathematical flaws. Specifi cally, Petitioners argue

I m iscalculated Jarden’s unlevered free cash flows
, m iscalculated the weighted
average cost of capital ( “ WACC ” )
, m iscalculated the terminal value and failed to
make proper adjust ments for certain tax shields and unfunded
pensi on / postretirement liabilities. According to Petitioners, correcting for these
errors results in a DCF value for Jarden of between $61.59 and $64.01 per share.

And because this valuation is not corroborative of the Court’s appraisal based on

Jarden’s U naffected M arket P rice , Petitioners maintain that the Court must adjust
its appraisal to reflect at least the range indicated by the corrected DCF analysis

.
3. “A motion for reargument under Court of Chancery Rule 59(f) will be
denied unless the court has overlooked a controlling decision or principle of law
that would have controlling effect, or the court has misapprehended the law or the

facts so that the outcome of the decision would be different.” 2 In the appra isal
context, this court has granted reargument in instances where the court has made

2 Those Certain Underwriters at Lloyd’s, London v. Nat’l Installment Ins. Servs. , 2008 WL 2133417, at *1 (Del. Ch. May 21, 2008).3

structural or mathematical errors in the course of performing its own DCF analysis. 3

For reasons explained below, I agree with Petiti oners that my DCF analysis must

be c orrected as the result of errors made in structur ing the DCF model and

calculati ng the value

. 4 I disagree, however, that the corrected DCF yields a fair
value in the range of $61.59 and $64.01 per share.

4. Unlevered Free Cash Flows

- The calculation of free cash flows in the
Opinion’s DCF m odel does not add back depreciation or deduct Jarden’s year

- over

year increase in net working capital. Petitioner corrects this error by adding

3 See
, e.g. , Doft & Co. v. Travelocity.com Inc. , 2004 WL 1366994 (Del. Ch. June 10, 2004); Henke v. Trilithic Inc. , 2005 WL 3578094 (Del. Ch. Dec. 20, 2005); DFC Glob al Corp. v. Muirfield Value P’rs , L.P. , 172 A.3d 346 (Del. 2017).

4 Ironically, in the Opinion, I cautioned that our courts should not wade “deep into the weeds of economics and corporate finance” without “the guidance of experts trained in these disciplines.” Op. at 2. Yet that is precisely what I did when I endeavored to conduct my own DCF analysis upon concluding that the credible evidence did not support certain aspects of both of the competing exper t s’ DCF valuations. While I stand by that factual determination
, I did not adequately account for the fact that making adjustments to the experts’ DCF models might require that other adjustments be made in order to stay true to the DCF methodology. I mad e other unforced errors as well. With the assistance of the parties, and their experts’ supplemental affidavits, I have attempted to correct those errors here as best I can acknowledging fully that there must be a “better way to run a railroad.” In view of the fact that the parties’ experts could not agree on any of the significant inputs for the DCF analysis, I am more convinced than ever that the experts’ inability to agree on inputs is evidence that DCF is not reliable here, particularly given the pres ence of a reliable “market

- based metric.” In re Stillwater Mining Co. , 2019 WL 3943851, at *61 (Del. Ch. Aug. 21, 2019). The better approach, therefore, would have been to leave it at that rather than “parse through the inputs and hazard semi

- informed gu esses about which expert’s view was closer to the truth.” Id. Having endeavored, instead, to work through the DCF on my own, I will see that process through to the bitter end by engaging in the revised DCF presented here.4

depreciation and subtracting the increase in net working capital . I agree th at this
adjustment is proper, and reflect the adjustment below:

5. Weighted Average Cost of Capital

- The Opinion’s calculation of

WACC incorrectly adjusted for tax twice, by making tax adjust ments to the after

tax cost of debt. Petitioner corrects for this error by omitting this second tax
adjustment from the after

- tax cost of debt. I agree that this adjustment is appropriate,
and reflect the adjustment below:5

I calculate the cost of equity , as I did in the Opinion, by using the capital asset
prici ng model (CAPM), which defines the cost of equity as follows:

r e = r f + β × ( r

m − r f ) + Size Premium

Where:

r f = Risk

- free rate (represented by 10

- yr U.S. Treasury bond rate)
β = Predicted equity beta (levered)

(r m − r f ) = Equity risk premium

I calcu late the after

- tax cost of debt by multiplying the pre

- tax cost of debt
(4.31%) by (1

- tax rate). To arrive at WACC, I multiply the cost of equity by the
equity to total capitalization, multiply the after

- tax cost of debt by the debt to total

ca p italization and add these two numbers together.

6. Terminal Value

- The terminal value equation cited in the Opinion
conceptually intends to calculate the terminal value in perpetuity based on the year
T+1 unlevered free cash flows, grow ing at the termina l growth rate and discounting

WACC. Petitioner points out that t he Opinion’s DCF Model does not use Terminal

FY21 NOPAT of $1,273 million in its formula to calculate the terminal value.6

Instead
, the Opinion’s DCF Model uses Terminal FY21 unlevered free c ash flows

of $939 million. 5 Petitioner corrects for this error as follows:

5 Op . at 141 ( the Opinion’s DCF Exhibit used FY20 NOPAT of $1,235 million × (1 + Terminal Growth Rate of 3.1% ). [A] FY20 NOPAT x 3.1% TGR; Opinion, pp. 110, 141; Exhibit 1 [B] Panel A: Opinion, p. 141; Exhibit 1, Panel B: n/a [C] Panel A: Opinion, p. 141; Exhibit 1, Panel B: n/a [D] Panel A: FY21 Revenue x (average (Capital Expenditures / Revenue) for FY 16

– FY20 ) ; Opinion, pp. 136, 141; Exhibit 1; Panel B: n/a [E] Panel A: [A] + [B]

- [C]

- [D]; Opinion, p. 141; Exhibit 1; Panel B: n/a [F] Panel A: [E] x (1

- 27.75% Te rminal Investment Rate); Opinion, p. 141; Panel B: [A] x (1

- 27.75% Terminal Investment Rate) (see Opinion
, pp. 115, 135

– 136, citing JX 1816 at ¶ 9 5; JX 2 515, Damodaran, Investment Valuation at 313) [G] WACC

- TGR = 6.94%

- 3.10% if using the Cou rt’s WACC and 7.29%

- 3.10% if using the corrected WACC (see Opinion, pp. 110, 135; Exhibit 3) [H] [F] / [G] [I] Row [A] [J] Row [F] [K] [I]

- [J]7

Petitioner then uses the Opinion’s 27.75% Terminal Investment Rate (TIR),

Terminal FY21 NOPAT and the capitalization factor to arrive at the final Terminal

Value. The Opinion derived the 27.75% TIR b y averaging Dr. Hubbard’s 33.9%

terminal investment rate (from the McKinsey formula for TIR 6 ) and Jarden’s 21.6%

historical five

- year average. 7 As explained in the Opinion, I took the average of

Dr. Hubbard’s investment rate and Jarden’s historical five

- year average because

I found that Dr. Hubbard had inexplicably included six years in his TIR, while the
terminal growth rate included only five. 8 “ By including the sixth year [ the 2010

investment rate of 64.3% ] in his calculation, Dr. Hubbard was able to reach a
significantly higher number for Jarden’s historical average growth. ” 9

I agree with Respondent that m aintaining 27.75% as the TIR in this revised

DCF valuation does not make sense for two reasons. First , as the Opinion notes and

endorses, “ the return on new invested capital should equal the company’s WACC ” 10

and
, as explained above
, WACC (as amended here) is 7.29%. The Opinion’s TIR
improp erly departs from this principle. Second , I no longer see a basis to a ccount or

6 TIR = g/RONIC

.

7 Op. at 110

– 1 2

.

8 Op. at 114.

9 Op

. at 114.

10 Op

. at 113 (citing Trial Tr. 1046 : 11

– 1049:23 (Hubbard); JX 2516; JX 2515).8

adjust for the unjustified sixth year of comparable growth as proffered by

Dr. Hubbard

. 11 This allows a straightforward application of the McKinsey formula
,
as endorsed in the Opinion, t o arrive at TIR given the corrected WACC and the
terminal growth rate. 12

Respondent has p resented in the Response the following calculation for
determining the terminal value, adjusted for revised RONIC :

While I agree with the methodology employed in this calculation, I note that my
math yiel ds $17,462, not $17, 464. In any event, I rely on the terminal value
($17,4 65 ) calculated in the revised DCF (below) since it is the product of the

unrounded numbers w ith which the parties now otherwise agree, except for the TIR.

To be clear, I adjust the terminal value calculation in order for RONIC to equal

WACC under the McKinsey formula , by multiplying one minus the revised terminal
investment rate (3.1%/7.3%) by t he FY21 net operating profits after tax ( or NOPAT)

11 In this regard, Respondent makes a valid point that the Court did not cite to finance literature or the record in reaching its “blended TIR.” Response at 11.

12 See Trial Tr. 1064:24

– 1065:6 (Hubbard); JX 2516 at 249

– 50; JX 2515 at 291; JX 1816 ¶ 94; Aff . Prof. Hubbard ¶ 7 (Aug. 2, 2019).9

(a value of $1,273 .3 ) . I then divide the resulting product ($731.8

— the FY21

unlevered FCF ) by the capitalization factor (7.29%

- 3.1% = 4.19% ) to reach the

terminal value of $17,465

.
7. Enterprise Value

- The Opinion’s DCF m odel treated FY16 as a full
year, and thus includes all of the FY16 unlevered free cash flows in its calculation.
The problem
, as Petitioner correctly notes, is that the merger closed in the first
quarter of FY16 so the calculation of FY16 free cash flows should be adjusted to
reflect the partial year.

Dr. Zmijewski adjusted for the partial FY16 by multiplying the full year FY16
forecasted unlevered free cash flows by the portion of the year that remained after

the me rger

. 13 Dr. Hubbard adjusted for the partial FY16 by calculating partial year
FY16 unlevered free cash flows as equal to the full year FY16 forecasted unlevered
free cash flows minus the actual first quarter FY16 reported unlevered free cash

flows. 14 I ado pt Dr. Zmijewski’s approach for the FY16 partial year adjustment

because , in my view, it more accurately accounts for the fact that the merger date

( April 15, 2016) was in the first few days of the second quarter of FY16

.

13 JX 1818, Ex. VI

- 7A.

14 JX 1816, Ex. 16

.10

8. Convertible Debt

- T he Opinio n ’s DCF mode l mistakenly adopted

Dr. Hubbard’s adjustment of $1.71 billion for convertible debt. Convertible debt is
dependent on pre

- tax cost of debt and the value of equity. Because the Opinion
changed Dr. Hubbard’s pre

- tax cost of debt and made other changes that affect
equity value, the value of convertible debt must also change. Dr. Hubbard updated
the convertible debt valuation from my DCF model to reflect the revised cost of debt
(4.31% pre

- tax) and the revised enterprise value that follows from t he other

corrections. Convertible debt, as the parties acknowledge, is derived from valuing
both the debt component and the warrant component of the c onvertible notes.

Dr. Hubbard e m

ploys an option

- pricing model to arrive at the value of both

components. In doing so, it appears Dr. Hubbard use d the share price he derived by
using the rounded terminal value that, as e xplained above , is not consistent with my
understanding of the proper application of the relevant formula

. Nevertheless, I will

not disturb Dr. Hubbard’s calculated value for convertible debt. Not only do

Petitioner s use Dr. Hubbard’s method of valuing convertible debt in in their revised

DCF, Dr. Hubbard has represented that he made the appropriate adjustments based

on the revised enterprise value and cost of debt and I have no basis to question that
representation

.
9. Amortization

- The Opinion’s DCF Model does not include any value
from tax savings that Jarden expected to receive from the amortization of intangible11

assets. Both experts included in their DCF models the value of tax shields that
Jarden expected to receive from the amortization of intangible assets. And b oth

experts valued these amortization tax shields using a discounted cash flow model. 15

I adopt Dr. Hubbard’s amortization tax shield since he uses the amortization
values found in the Proxy, but I apply the corrected 7.29% WACC and 35% tax rate,
which yields a value of $110.2 million.

10. Pension and Post

- Retirement Liabilities

- The Opinion ’s DCF model

does no t include any subtraction for pension and post

- retirement liabilities in the
calculation of the value of equity. Both experts included a deduction of $159 million

in their calculation s of the value of equity. I agree that this adjustment is appropriate.

11. The Corrected DCF Valuation

- Correcting for the errors noted

above, the corrected DCF valuation is as follows:

15 JX 1816 ¶¶ 134, 138 ; JX 1818 ¶ 69.12

12. The revised DCF, correcting for the errors properly identified by
Petitioners and the revised TIR required by a proper application of the McKinsey
formula yields a fair value for Jarden of $48.23 per share. “Hazardous” as it may be
to rely upon the result s of this valuation methodology in this context, particularly

when credible market evidence of value is available, 16 I am satisfied that the revised

16 See Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. , 177 A.3d 1 , 35

– 37 (Del. 2017) (observing that “[a]lthough widely considered the best tool for valuing companies when there is no credible market information and no market check, DCF valuations involve many inputs

– all subject to disagreement by well

- compensated and Discounted Cash Flow Analysis

($ in Millions) FY16 FY17 FY18 FY19 FY20 Termin al FY21

Revenue $10,147 $10,640 $11,172 $11,731 $12,317 $12,928

Growth Rate

-- 4.9% 5.0% 5.0% 5.0% 5.0%

Unlevered Cash Flow $751 $884 $970 $1,044 $1,122 $73 1.8

- Cash Flow for Portion of Year Already Elapsed 210 0 0 0 0

-

Unlevered Free Cash Flow Adjusted for Portion of Year Already Elapsed $541 $884 $970 $1,044 $1,122 $73 1.8
Capitalization Factor (WACC

– TGR) 4.2% Terminal Value $17,4 65 Time Period 0.36 1.21 2.22 3.22 4.22 4.22

Discounted Cash Flows 527 811 830 832 834 12,97 8
Enterprise Value $16,81 3 Non

- Convertible Debt (5,043) Value of Convertible Debt (1,865) Pension and Postretirement Liability (159) Cash 749 Amortization Tax Shield 110 Equity Value $10,60 5

Shares 219.9 Share Price $48.2 3 Assumptions

WACC: 7. 29 % Terminal Growth: 3.1% ROIC: 7. 29 % FY21 Rev Growth: 5.0% FD Share Count 219.913

DCF valuation corroborates the Court’s appraisal based on the Unaffected Market
Price of $48.31 per share.

Based on the foregoing, the Motion for Reargument is GRANTED in part as
it relates to the Court’s DCF valuation, and DENIED in part as it relates to the

Court’s final fair value determination

.
IT IS SO ORDERED.

/s/ Joseph R. Slight s III Vice Chancellor

highly credentiale d experts

– and even slight differences in these inputs can produce large valuation gaps[,]” and then warning, “the Court of Chancery should be chary about imposing the hazards that always come when a law

- trained judge is forced to make a point estimate of fair value based on widely divergent partisan expert testimony.”).