PetSmart Not Undervalued in $8.7B Buyout: Del. Court

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By Michael Greene

PetSmart Inc. investors couldn’t convince the Delaware Chancery Court that their shares were undervalued in the company’s $8.7 billion going-private transaction in 2015 ( In re Appraisal of PetSmart Inc. , 2017 BL 177567, Del. Ch., No. 10782-VCS, 5/26/17 ).

The parties’ merger price was the best indicator of the fair value of the Phoenix-based retailer of pet products and services, Vice Chancellor Joseph Slights III ruled May 26.

The 109-page decision provides more clarity as to when the chancery court will defer to the parties’ negotiated price, as opposed to using other valuation methods to determine a company’s value.

A consortium of funds led by BC Partners Inc. acquired PetSmart in March 2015 for $83 per share. Stockholders who collectively owned over 10.7 million shares claimed the company should have been valued at $128.78 per share.

Rise in M&A Appraisal Challenges

Under Delaware law, shareholders that choose not to participate in a merger can file appraisal lawsuits asking the chancery court to assess a “fair value” for their shares.

Over the last five years, there has been an increase in appraisal actions, according to Bloomberg Law data. There have been 22 such lawsuits filed as of mid-April challenging 11 deals. There were 77 appraisal lawsuits filed in 2016 challenging 48 deals, compared to 51 lawsuits in 2015 challenging 33 deals.

Slights said that while PetSmart’s sales process wasn’t perfect, it “came close enough to perfection to produce a reliable indicator” of the company’s value.

“Accepting Petitioners’ contention that the fair value of PetSmart was $128.78 per share would be tantamount to declaring that a massive market failure occurred here that caused PetSmart to leave nearly $4.5 billion on the table,” Slights said. “In the wake of a robust pre-signing auction among informed, motivated bidders, and in the absence of any evidence that market conditions impeded the auction, I can find no basis to accept Petitioners’ flawed, post-hoc valuation and ignore the deal price.”

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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