The Columbia Pipeline matter is a Statutory Appraisal proceeding under 8 Del. C. § 262 to determine the fair value of Columbia Pipeline Group, Inc. (“Columbia”) common stock. The valuation date was July 1, 2016, when TransCanada Corporation completed its acquisition of Columbia. Under the merger agreement dated March 17, 2016, each share of Columbia common stock was converted into the right to receive $25.50 in cash, subject to each stockholder’s right to seek appraisal. Dissenting stockholders exercised those rights and petitioned the Court of Chancery to determine fair value as of the merger’s effective date.
The petitioners sought a fair value of $32.47 per share, derived from a discounted-cash-flow (“DCF”) analysis prepared by their expert, William Jeffers. TransCanada contended that the $25.50 deal price was the most reliable indicator of fair value and retained Professor Mark Zmijewski—Professor Emeritus at the University of Chicago Booth School of Business—as its valuation expert, supported by Erik Himan. TransCanada did not submit its own DCF analysis of Columbia; instead, Professor Zmijewski’s testimony addressed three issues: merger synergies, the reliability of Columbia’s unaffected trading price, and a critique of the petitioners’ DCF model.
Professor Zmijewski’s testimony focused principally on the petitioners’ DCF model. He evaluated several of its key inputs and estimated more economically reasonable alternatives to examine the resulting sensitivity of the model’s output. He analyzed the reliability of Jeffers’s terminal value, which accounted for roughly 125% of the petitioners’ valuation, as Columbia’s business plan projected nearly $4 billion of negative free cash flow during the projection period. He further examined the model’s 3% perpetuity growth rate, which exceeded the rates implied by the company’s analyses from its financial advisors, and conducted a sensitivity analysis of the growth rate to Columbia’s valuation per share. Finally, he evaluated the reliability of the model’s core input—the underlying management projections—which assumed substantial returns from unidentified projects lacking customers or regulatory approval.
The court found that the substantial variations produced by legitimate debate over reasonable inputs undermined the DCF model’s reliability. The Court also observed that the petitioners’ valuation differed materially from the deal price, the unaffected trading price, and the behavior of other potential acquirers that declined to exceed TransCanada’s offer. Consistent with the Delaware Supreme Court precedent favoring market-based evidence when reliable, the court concluded that the DCF method was “necessarily a second-best method to derive value” and declined to rely on it. The court determined that the fair value of Columbia’s common stock as of the effective date was $25.50 per share—equal to the deal price—rejecting both the petitioners’ higher DCF valuation and TransCanada’s claimed synergy deduction.