Question
March 4, 1986
(redacted)
Via Hand Delivery
Mr. Andrew Scanlon
Federal Trade Commission
Bureau of Competition
Pre-Merger Notification Office
Room 301
Sixth & Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Hart-Scott-Rodino
Notification
Dear Mr. Scanlon :
Over the past four months I have discussed with you the notification requirements of Section 7A of the Clayton Act (Hart-Scott-Rodino), and its applicability to a proposed acquisition of a cable television company by a newly formed limited partnership. This letter confirms my understanding, based upon these discussions, that the notification provisions of Hart-Scott-Rodino will not apply to that transaction, which is described below. This request is made pursuant to Section 803.30 of the rules. In essence, notification requirements will not apply because the acquiring and acquired persons in this transaction do not satisfy the minimum size of person test as defined in the Act.
For the notification requirements to apply the following conditions must exist. First, with respect to an acquired party not engaged in manufacturing, its total assets must be at least $10 million. Second, the acquiring party in such a transaction must have total assets or annual net sales of $100 million or more. Alternatively, notification will be required where the acquired person has annual net sales or total assets of at least $100 million, while the acquiring party has total assets or annual net sales of at least $10 million.
In the contemplated transaction, a newly formed limited partnership will acquire the assets of a cable television company. The acquiring limited partnership will, upon formation, have total assets of approximately $125 million, which will consist of both debt and equity contributions. However, upon consummation of the proposed purchase of the cable system, the limited partnership will expend $107 million of its $125 million in cash. The majority of this cash payment will be to the existing stockholders of the cable television company, while the remaining portion of the expenditure will be utilized to retire the cable system's existing liabilities, including debt, tax liabilities, and certain prepayment penalties. Thus, because $107 million will immediately "pass through" to the stock holders of the cable company, and its creditors, the size of the acquiring limited partnership is $18 million. Of course, as a limited partnership, it is the ultimate parent entity of the acquiring party.
Because the acquiring person has assets that exceed $10 million, but are less than $100 million, for the notification requirements to apply the acquired person must have annual net sales or total assets of at least $100 million. 15 USC 18A (a)(2)(c). The acquired person in this instance is a cable company that is its own ultimate parent entity. This is because 90 percent of the cable company is currently owned by a large number of separate irrevocable trusts, none of which holds 50 percent or more of the stock or has the contractual power to designate a majority of the cable system's directors. Section 801.11 of the rules explains that to compute the annual net sales of a person, reference is made to its last regularly prepared annual statement of income and expense (dated within 15 months of notification or consummation of the acquisition). With respect to the computation of total assets, reference is made to the person's last regularly prepared balance sheet. Reference to the appropriate financial statements demonstrates that the cable system's annual net sales are approximately $20 million, and that the total assets of the cable system after depreciation are approximately $28.8 million. These assets, before depreciation, have a value of approximately $42.5 million.
From the analysis discussed above, it is clear that the acquired party does not meet the minimum size of person test to trigger the notification requirements. Parties to this transaction will proceed under the assumption that no notification is required, unless information to the contrary is received from your office within three days from the date of this letter.
Very truly yours,
(redacted)