## Facts

- Cellular Information Systems, Inc. (Cellular) and related debtors were in Chapter 11, and both Cellular and its bank creditors (the Banks) filed competing plans of reorganization.
- Before evaluating confirmation questions raised by the rival plans, the bankruptcy court held it had to determine Cellular’s going-concern enterprise value.
- Cellular asserted a going-concern value in the range of approximately $134 to $159 million, supported by discounted cash flow (DCF) modeling.
- The Banks disputed Cellular’s valuation and offered a substantially lower estimate of about $101.4 million.
- A central dispute concerned Cellular’s revenue projections, including estimates for roamer revenue and home-subscriber revenue.
- The Banks contended Cellular’s projections were unrealistically high because they did not sufficiently account for competitive, financing, marketing, and demographic pressures affecting Cellular’s business.
- The parties also differed on risk and discount rate: the Banks used a 14% discount rate, while Cellular used a range roughly between 12.5% and 17.5%, with assumptions that reflected less risk than the Banks’ view.
- Terminal value was contested as well. Cellular’s assumptions yielded more favorable terminal multiples, while the Banks’ approach used lower multiples intended to reflect competitive pressure and Cellular’s disadvantages in the industry.
- The court evaluated testimony and valuation evidence, finding that both sides’ analyses contained errors and advocacy-driven choices, requiring the court to make its own value determination.

## Issues

1. What is Cellular’s appropriate going-concern enterprise value, for use in evaluating the competing Chapter 11 plans?
2. In applying a DCF approach, how should the court assess projections, discount rate, and terminal multiple assumptions offered by opposing parties?

## Decision

- The court determined that a valuation finding was required before it could meaningfully compare the competing reorganization plans.
- The court found Cellular’s valuation overstated value due to optimistic cash-flow projections and assumptions that did not sufficiently reflect business risk and competitive conditions.
- The court also found the Banks’ valuation analysis, while more conservative, was not free from error and could reflect overly pessimistic inputs.
- Rather than adopt either side’s valuation wholesale, the court made an independent going-concern valuation based on the evidentiary record, adjusting key assumptions (including projections, risk/discount rate treatment, and terminal value inputs).
- The court’s resulting value fell between Cellular’s higher range and the Banks’ lower figure, and the court used that value as a necessary predicate for later plan-related analysis.

## Legal Principles

- In Chapter 11 plan disputes where value affects distributions, the bankruptcy court must determine the debtor’s going-concern value as a factual matter based on the record.
- Valuation is not a forced choice between two numbers offered by the parties; the court may reject parts of each side’s model and arrive at its own determination.
- DCF valuation depends on realistic cash-flow projections. Projections that fail to account for market competition and business conditions may be discounted.
- The discount rate must reflect risk appropriate to the debtor and its industry; altering perceived risk materially changes present value.
- Terminal value assumptions and terminal multiples must be tested against long-term competitive conditions and the debtor’s position in the market, and unsupported multiples may be adjusted.

## Conclusion

The court treated going-concern valuation as a prerequisite to evaluating the competing Chapter 11 plans, found flaws in both Cellular’s optimistic DCF inputs and the Banks’ conservative approach, and made an independent enterprise value determination—between the parties’ figures—by adjusting projections, risk assumptions, and terminal value components to better match the evidentiary record.


In re Cellular Information Systems, Inc., 171 B.R. 926 (1994)