1109017 Informal Interpretation

Michael Verne

  – Agree.





Friday, September 16, 2011 10:25 AM


Verne, B. Michael


Valuation of Noncorporate Interests


Wehave a question regarding the impact of debt on the valuation of noncorporateinterests. The following is a brief description of the proposed transaction andour analysis of its reportability under the HSR Act.


Ourclient (the "Acquired Entity") is in the process of negotiating amerger transaction pursuant to which 100% of its noncorporate interests wouldbe acquired by the Acquiring Person. The purchase price for the noncorporateinterests, as described in the proposed Merger Agreement, is approximately $80million. The Acquired Entity currently has approximately $40 million in debt tothird party lenders. When the debt was originally incurred, approximately $27million of the debt proceeds was used to refinance the Acquired Entity's priordebt and the remaining $13 million was used to make a distribution to theAcquired Entity's members.

The purchaseprice stated in the acquisition agreement is $80M. At closing, Buyer willtransfer the $80M in cash to the paying agent, who will in turn pay-off theSeller's existing $40 million of debt. The remaining $40 million will bedistributed to the members of the Company pro rata in accordance with theirrespective membership interests.


Under801.10(d) of the HSR regulations, we understand that the valuation of noncorporate interests is generally the same as the valuation of voting securities,such that, in an acquisition of noncorporate interests that confers control,the value of the noncorporate interests held as a result of the transaction isthe acquisition price of the interests to be acquired (if the acquiring persondoes not already hold any interests of the acquired entity). We also understandthat in the valuation of noncorporate interests, the value of the seller'sliabilities is not added to the acquisition price (e.g. Informal Interpretation#0503005).

Informalinterpretation #0905006 suggests that if the Acquiring Person pays off debtof the Acquired Entity at the closing of an acquisition of voting securities,the amount of that debt is excluded from the purchase price. Similarly,informal interpretation #0305012 provides that, in determining the acquisitionprice of voting securities for HSR purposes, the value of liabilities beingassumed in the acquired entity should be excluded.

Althoughinformal interpretations #0905006 and #0305012 described above relate to theacquisition of voting securities as opposed to noncorporate interests, ourunderstanding is that the analysis is the same in both cases. As a result, wehave concluded that the $40 million of debt would not be included in thevaluation of the noncorporate interests, and as a result, the acquisition pricefor HSR purposes is approximately $40 million (notwithstanding that thepurchase price stated in the acquisition agreement is $80M). Assuming this isthe case, the transaction would not be reportable under the HSR Act because it

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