May 26, 2017 / 8:26 PM / 2 months ago

Court finds Petsmart buyout fair in blow to appraisal strategy

3 Min Read

WILMINGTON, Del., May 26 (Reuters) - 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)

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