Question
From: (redacted)
Sent: Tuesday, September 04, 2007 12:17 PM
To:Verne, B. Michael Subject: HSR Valuation Question
Mike,
I have a slightly complicated transaction (actually,multiple transactions) that I would like to run by you to confirm whether I am valuing the transactionscorrectly (and ultimately whether any HSR notifications are required).
Buyer will acquire Target A,Target B, Target C, and Target D (in that order) contemporaneously shortlyafter itsuccessfully completes its IPO. (The IPO will raise the funds necessary toacquire these companies.) Please assume that the parties all meet thesize-of-person threshold.
Buyer will first purchase the ULC interests (which Iunderstand are treated as voting securities for HSR purposes) in Target A for approximately$59 million. Although this is below the size-of-transaction threshold, Target Ais a subsidiary of Target B, and the value of the ULC interests in Target Abeing acquired presumably would need to be aggregated with the LLC interestsbeing acquired in Target B for purposes of determining the size-of-transaction.
Buyer will then purchase the LLC interests of Target B,Target A's UPE, for approximately $78 million.
Buyer will then purchase the LLC interests of Target C forapproximately $23 million, which is below size-of-transaction. Because Target Cis unaffiliated with the other parties and does not have a common parent, wecan set Target C aside for purposes of this analysis.
Buyer will then purchase the LLC interests of Target D forapproximately $92 million. Target D also is unaffiliated with the other parties and doesnot have a common parent.
The approximately $59 million "purchase price"for Target A includes approximately $21 million in cash consideration, $600,000of consideration in the form of preferred, non-voting stock of the Buyer, and approximately $37 million in theform of a loan from Buyer to Target A. Part of the loan will be used to pay off outstanding third party debt (so Buyer acquiresTarget A debt-free), and the remainder of the loan is to provide cash liquidity.
The approximately $78 million "purchase price"for Target B includes approximately $21 million in cash consideration, $1million of consideration in the form of preferred, non-voting stock of theBuyer, and approximately$56 million in the form of a loan from Buyer to Target B. Part of the loan willbe used to pay off outstanding third party debt (soBuyer acquires Target B debt-free), and the remainder of the loan is to provide cash liquidity.
The approximately $92 million "purchase price"for Target D includes approximately $31 million in cash consideration, $900,000of consideration in the form of preferred, non-voting stock of the Buyer, and approximately $61 million in theform of a loan from Buyer to Target D. Part of the loan will be used to pay off outstanding third party debt (so Buyer acquiresTarget D debt-free), and the remainder of the loan is to provide cash liquidity.
Based on informal interpretations, my understanding isthat the amount of debt being paid off (using the loan from Buyer to sellers) would not beincluded in the valuation of the acquisitions of Targets B and D (where LLCinterests are being acquired). This would also be true for Target A since theULC interests are treated as voting securities.Please confirm this understanding is correct.
What Iam less sure of is whether the amounts of the loans from Buyer to sellersfigures into valuation at all. While not directly on point, my reading ofInterpretation 111 in the Premerger Notification Practice Manual suggests thatthe loans would not figure into the valuations of the transactions.Interpretation 111 asks whether "[On the formation of a corporate jointventure, where three companies will each contribute an existing operating plantand also extend loans to the joint venture corporation, how do the formingcompanies determine the value of the new venture's voting securities that theywill acquire."
Theanalysis states (in relevant part): "The PNO's position is that the valueof the voting securities to be acquired by each of the three companies reflectsthe value of the combination of the three plants and also the value of anyadditional consideration contributed to the venture by each. (Note that thevalue of the voting securities to be acquired by each of the formingshareholders reflects one-third of the entire value of the three combinedplants that they have agreed to contribute, regardless of when the contributionwill be made.) The principal amounts of the loans should not be considered invaluing the securities, pursuant to Section 801.10(c)(2), if the loans werearm's length transactions made at current interest rates, with the expectationof being repaid by the venture. If the loans were offered at favorable rates,however, there must be an assessment of the value attributed to the differencebetween the value of a loan at market rates and the value of the loan at thefavored rate, and this must be added to the cash contributions to determine thevalue of the voting securities being acquired...."
Obviously,the facts above are different since in that the Interpretation addresses theformation of a new entity issuing voting securities, not membership interests,but it was the closest thing I found. Buyer's loans to sellers are being madeat market rates.
If Iam correct, I would not include the amount of debt being paid-off by Buyer, norwould I include the amounts of the loans being made to Targets A, B and D invaluing any of the transactions. As such each transaction would be below the $59.8million size-of-transaction threshold, the acquisitions of Targets A and Bwould also be below the size-of-transaction threshold even when aggregatedpursuant to 16 CFR 801.14.
Please confirm that myunderstanding is correct, and please feel free to call me if you have anyquestions or would like to discuss further.