Andrew Bary

When shareholders are unhappy with a merger, they generally try to kill it or improve the terms before the transaction closes.

In the case of Silver Lake's $13 billion buyout of Endeavor Group Holdings, they are using an obscure Delaware rule that allows them to challenge the terms after the deal is completed, using so-called appraisal rights.

It is shaping up as the biggest appraisal rights case ever, and could emerge as a landmark court case in Delaware.

More than half the public shareholders in Endeavor -- representing some 150 million shares according to a brief filed in April -- are poised to challenge Silver Lake in Delaware Chancery Court. They're seeking a higher price than the $27.50 in cash that was paid to investors when the deal closed on March 24.

It is rare for a sizable number of shareholders to participate in an appraisal process, which can take two years, because Delaware courts generally have been unwilling to second-guess a deal price. The filing rules are also complicated, and the process can be expensive.

But tech-investment firm Silver Lake, which controlled Endeavor, didn't hold a shareholder vote by public holders on the transaction, leaving appraisal rights the only avenue for public investors who felt shortchanged by the deal.

Endeavor was headed by Hollywood superagent Ari Emanuel, who is now executive chairman of WME Group, which holds some of the company's representation businesses, including what used to be the old William Morris talent agency. The now-private Endeavor's most valuable asset by far is a majority stake in TKO Group Holdings, the owner of UFC (Ultimate Fighting Championship) and WWE (World Wrestling Entertainment).

Emanuel and other members of Endeavor's top management participated with Silver Lake in taking the company private. Silver Lake owned nearly 40% of the company and management about 10% before the buyout, Barron's estimates based on public disclosures.

There were a total of about 460 million shares outstanding.

Silver Lake issued a statement in early March amid speculation that it might boost the merger consideration. It stated the deal price was "appropriate and fair consideration to all Endeavor shareholders."

Silver Lake noted the deal price amounted to a 55% premium to Endeavor's stock price in October 2023 before Silver Lake announced its desire to make a proposal to take the company private. A Silver Lake spokesman said the firm has no further comment.

The dissenting shareholders could seek a price of $40 a share or more, based on the 65% rally in TKO shares from the deal announcement in April 2024 to the closing date in March.

If successful, holders could get appreciably more than the $40 a share because they stand to get interest paid at a 9% annual rate from the deal closing date until the court-ordered payment is made, based on Delaware law. That could mean a total potential payday for investors of over $6 billion.

In seeking appraisal rights, these holders opted to forego getting the $27.50 a share takeover price. A Delaware judge will decide what they will get -- or effectively appraise the value of the company to determine fair value. It could be more or less than $27.50 a share.

The key date for valuation purposes is the closing date in March 2025, and not the date the deal was announced in April 2024, according to legal filings.

Currently, Silver Lake and Endeavor's management stand to reap a gain of about $6 billion based on the run-up in TKO stock from the time the deal was set in April 2024 until closing in March. TKO stock now trades even higher at $159, up from about $150 in March. Silver Lake may have to share some of those spoils with the dissenting shareholders based on what the judge decides.

The value of TKO stock embedded in each Endeavor share was about $38 on March 24 when the deal closed, Barron's estimates. Endeavor's other assets could be worth several dollars a share net of debt, bringing the total value above $40 a share. With the bulk of the value in Endeavor consisting of TKO stock, it makes it easier for appraisal-rights seekers to make their argument for a higher payment than $27.50 a share since there is clear market value on TKO shares.

The dissenting shareholders include many firms that are active in arbitrage and special situations, including Pentwater Capital Management, AQR Capital Management, and Adage Capital Partners, according to the April filing. The largest public holder, and a participant in the appraisal process, is Troluce Capital Advisors, an investment firm headed by Jared Dubin. Troluce is estimated to own about 35 million shares in Endeavor.

Westchester Capital, which runs the $2.3 billion Merger Fund, is among those that plan to seek appraisal rights for its shares.

"My view is that it's inevitable that Silver Lake and Ari Emanuel will have to pay more for our shares," says Roy Behren, co-president and chief investment officer at Westchester Capital. "I see no possible scenario in which a judge will agree that $27.50 was a fair value as of the date the deal closed."

Barron's wrote about the Endeavor situation before the deal closed in March and predicted that many investors would seek to make use of the appraisal process.

It is possible that Silver Lake could try to settle with dissenting shareholders seeking appraisal rights before the trial. But the firm has held fast to the $27.50 takeover price. It wouldn't boost its offer for Endeavor in the weeks before the deal closed -- an action that could cause many investors to avoid taking the appraisal route. Endeavor stock traded as high as $35 in the weeks before the deal closed amid speculation about a higher bid by Silver Lake that never materialized.

Billionaire Carl Icahn's investment vehicle, Icahn Enterprises $(IEP)$, also popped up as a large shareholder just before the deal closed on March 24. IEP filed that it held 27.5 million of Endeavor on March 21 and then zero on March 24 when the deal closed.

This suggests Icahn didn't qualify to file for appraisal rights because that deadline was in early February, or he chose not to. IEP hasn't responded to a request for comment from Barron's.

One looming issue is what law firm will be named lead counsel by the Delaware courts for the appraisal case. It could be a lucrative assignment given the potential payoff to investors.

A brief was filed in April in support of the lead counsel role jointly by two firms: Heyman, Enerio, Gattuso and Hirzel of Wilmington, Del., and Rolnick, Kramer and Sadighi of New York.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 29, 2025 02:30 ET (06:30 GMT)

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