Minority Owners Challenge Share Price of First Union Financial

by George Waldon  on Monday, Jan. 20, 2014 12:00 am  

Photo courtesy of SEArkToday.com

“If he didn’t do that, Union Bank wouldn’t have survived, and those shares wouldn’t be worth anything.”

The bank has been profitable since 2005, but shareholders haven’t received a dividend from bank profits in more than 10 years. Instead, dividends have flowed to the holding company to repay recapitalization debts or remained in the bank to rebuild capital.

Some shareholders believe they are being forced out by the McClendons in advance of a restart of dividend payouts.

The $182.30 share price isn’t a dart-board creation of the McClendons. The number is the product of a stock appraisal based on the year-end 2012 numbers for First Union. The shares were deemed to be a “marketable minority interest” for valuation purposes in the appraisal analysis used by the McClendons.

Under that premise, the book value of the minority shares in First Union Financial was discounted by nearly 28 percent.

That effective discount was the result of an amalgamation of four valuation methodologies based on income and three market approaches bearing a risk-adjusted capitalization factor: price to earnings, price to book value and price to tangible book value.

Those four assessments produced valuations that ranged from a low of $144.63 per share under the adjusted price to earnings method to a high of $239.26 per share under the adjusted price to tangible book value method.

The lowest two values were weighted 30 percent each, and the highest two were weighted 20 percent each to produce a marketable minority interest of $182.30 per share.

Though mentioned in the narrative, the asset-based approach — basic book value — received zero consideration because of the marketable minority interest premise.

That book value of $251.85 per share contrasts with $182.30 per share derived from the marketable minority interest appraisal used by the McClendons as a cost basis in their buyout.

Though mentioned in the appraisal, the definition of fair market value was turned on its head considering the McClendon buyout gave other shareholders no choice but to sell at $182.30.

Fair market value is considered to represent a value at which a willing buyer and a willing seller, both being informed of the relevant facts about the business, could reasonably conduct a transaction, neither party acting under a compulsion to do so.



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