Case Study: Financial Opinion Services

Fairness Opinion - Related Party Option Agreement

Our Client

The Special Committee of the Board of Directors of a public real estate and entertainment company (the "Company") managed by a highly experienced and successful team

Situation

The Company licenses the right to use certain intellectual property assets owned by a related IP rights holding company (the "IP Co."). Based, in part, on the projected royalty payments to become due as a result of the Company's planned development of two high profile theme hotel and entertainment projects, the Company sought to acquire 85% of the IP Co. in order to control the key asset that would be critical to the Company's future growth and profitability. To preserve its current capital base, the Company wished to secure the right to acquire the majority and controlling interest in the IP Co. through a six year option agreement requiring aggregate option payments in excess of $100M with escalating exercise prices ranging from $650M to $850M. The Special Committee retained The Salter Group to (i) evaluate and negotiate certain aspects of the transaction, and (ii) render an opinion as to whether the transaction was fair to the Company from a financial point of view.

Key Issues/Services

Assessing the forecasted value of the IP Co. at various points in time during the term of the option, while considering the value enhancement directly related to the success of the Company's development projects
Determining the volatility of the option as part of the valuation exercise by analyzing the volatility of public company options and other indications of option volatility
Utilizing a unique IRR-based approach and alternative pricing models, while considering the Black Scholes and Binomial Lattice approaches, to assess the financial aspects of the proposed transaction due to the inherent limitations of relying on the traditional single current payment nature of certain option-pricing models
Reviewing both management and sensitized forecasts, with varying exit multiples and discount rates, in order to assess the fairness of the transaction under various performance scenarios
Considering the financial impact of certain aspects of the option agreement, including (i) the Company's ability to make certain option payments by delivering unsecured promissory notes in lieu of cash, (ii) existing puts and call options regarding the remaining 15% of the IP Co., and (iii) extensions of the option period, refunds of certain option payments and/or reductions of the exercise price in the event the IP Co. fails to achieve certain earnings performance thresholds
Drawing upon our recent experience in advising clients in the construction industry and the live entertainment performance business in order to evaluate the reasonableness of management's forecasts

The Salter Group's Role & Outcome

We assisted the Special Committee in evaluating and negotiating the terms of the transaction.
We rendered an opinion as to the fairness, from a financial point of view, of the consideration to be paid by the Company in connection with the transaction.
The Special Committee and the Board of Directors of the Company approved the terms of the option agreement and consummated the transaction.

« Back