1209011 Informal Interpretation

Date:
Rule:
801.10
Staff:
Michael Verne
Response/Comments:

  The $10 million would not be included as consideration for the partnership interests. On the rollover: 1) If the current partners retain their interests directly in the Target, they would not be included in the value of the transactions. 2) If they receive interests in the new entity, the value of 100% of Target would be included. Examples 1) The current partners retain 25% of the interests of Target in aggregate. X acquires 75% of Target. The value is 75% of Target. 2) X acquires 100% of Target through acquisition vehicle Newco. Partners of X receive 25% of Newco as partial consideration. The value is 100% of Target.

Question

From:

(Redacted)

Sent:

Thursday, September 27, 2012 3:27 PM

To:

Verne, B. Michael

Cc:

(Redacted)

Subject:

Valuation of partnership interests

Hi,Mike,

Pleasecall to discuss if you have questions about the scenario described below:

Xwill acquire control of a partnership ("Target") in exchange for $65million. The purchase price could be adjusted upwards post-closing to take intoaccount working capital adjustments. I understand that so long as suchadjustments can be reasonably estimated before closing, our acquisition pricewould be considered determined taking into account such estimate. In addition,however, X could pay the sellers up to $10 million post-closing to reimbursethem for certain capital expenditures that it makes sense for Target to starton now (if the transaction does not close, Seller would just bear that cost; ifthe transaction does c1os'e, buyer would bear it). Could we take the position thatthe capital expenditure reimbursement is not compensation for the partnershipinterests being acquired, but is instead more akin to transaction expenses forwhich the buyer compensates the seller, and therefore such payment would not beconsidered part of the acquisition price for Target?

Itis possible that some of Target's current partners will be rollover holders. Ifthey retain their interests directly in the Target, we would not include thevalue of such interests in the acquisition price paid by X. What if instead ofretaining their interests directly in the Target, they were given the samepercentage that they would otherwise retain of voting securities or equity inX, the entity newly formed to acquire the Target that holds no other assets besidestarget? Would the value of such equity be considered part of the acquisitionprice for the Target, or would it be treated as if such equity just remained atTarget and was not acquired by X (as it is the same economic impact / indirectownership in either case)? If we would have to include the value of theinterests acquired in X, how would we value such interests if X does not holdanything before it acquires controlling interests in the Target? I assume thatwe would not have to value such interests as the rollover would take placeimmediately prior to the acquisition of Target, at a time where X has no assetsand thus its equity is worth zero.

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