Question
From:
(Redacted)
Sent:
Wednesday, September 21, 2011 5:57 PM
To:
Verne, B. Michael
Subject:
HSR question concerning debt pay-off
Mike
Ihope that you are doing well. I am writing to request your thoughts on atransaction, which is described below. I appreciate your time and look forwardto hearing from you.
Anumber of years ago, B incurred bank debt, in part in connection with theacquisition of several businesses. Over the last 3 years, B refinanced aportion of the debt and now carries, in addition to approximately $95 millionof senior debt owed to a third-party bank, subordinated debt in the amount ofapproximately $155 million, which is owed to three Lender LLCs. Mr. X is theUPE of B and also is the UPE of the three Lender LLCs.
CompanyB is planning to form a new holding company (H), and the shareholders of B willexchange their B shares for shares in H, so that B will continue as a whollyowned subsidiary of H. H will assume all of B's subordinated debt. The seniordebt will remain with B.
Hwill then create two new wholly owned subsidiaries (HSUB-1 and HSUB-2). B willcontribute various assets to each of HSUB-1 and HSUB-2, and will retain certainassets.
Hwill then sell 100% of the LLC membership interests of HSUB-1 to Company C andwill sell 100% of the LLC membership interests of B to Company A. H willcontinue to hold 100% of the LLC membership interests of HSUB-2.
Awill pay $185 million to acquire B. C will pay $95 million to acquire HSUB-1.It is the intention of the all the parties that the proceeds from these twotransactions will payoff both the bank debt and the subordinated debt, so thatthe shareholders of H will receive net proceeds of approximately $30 million inthe aggregate for the LLC membership interests of B and HSUB-1. A and C willreceive the LLC membership interests of Band HSUB-1, respectively, free of anydebt or liens.
Althoughit is not clear which transaction will close first, we believe that theacquisition price for the LLC membership interests of B and HSUB-1 will bedetermined at the time of the transactions, and that there are no circumstancesunder which the acquisition of B by A or HSUB-1 by C is subject to thereporting requirements of the HSR Act.
Ifthe acquisition of B closes first, the acquisition price of the membershipinterests of B will be $0 and the acquisition price of the membership interestsof HSUB-1 will be $30 million. Of the $185 million purchase price for B, $95million will be used to pay the senior debt and $90 million will be applied tothe subordinated debt. Of the $95 million purchase price for HSUB-1, $65million will be used to pay the remaining outstanding subordinated debt. Theacquisition price for the membership interests of C will be $30 million.
Ifthe acquisition of HSUB-1 closes first, the acquisition price of the membershipinterests of HSUB-1 will be $0 and the acquisition price of the membershipinterests of B will be $30 million. All of the $95 million purchase price forHSUB-1 will be applied to the subordinated debt. Of the $185 million purchaseprice for B, $95 million will be used to pay the senior debt and $60 millionwill be used to pay the remaining outstanding subordinated debt. Theacquisition price for the membership interests of B will be $30 million.
Eventhough Mr. X is the UPE of H, B, HSUB-1 and the three Lender, LLCs, the fundsused to payoff debt owed by B, H, and/or HSUB-1 to the three Lender,LLCs are not included in the acquisition price for the LLC membership interestsof B or HSUB-1.
Forthese purposes, please assume that A has determined that the fair market valueof the LLC membership interests of B is less than the current $66 millionsize-of-transaction threshold, and that C likewise has determined that the fairmarket value of the LLC interests of HSUB-1 is less than the current $66million size-of-transaction threshold.
Itis our view that, even though the parties are aware that this structure wouldresult in not having to file an HSR Premerger Notification and Report, thesubstance of this transaction is nonreportable. It also is our view that thestructure is not a device for avoidance under 16 C.F.R. 801.90 because theunderlying transaction is the purchase of noncorporate interests with apurchase price and fair market value that does not meet the size-of-transactionthreshold. Finally, we believe this conclusion is consistent with PremergerNotification Practice Manual Interpretation 91.
Thankyou, as ever, for your time and assistance. Please let me know if you agreewith these conclusions. We would be happy to provide any additional facts youmay need for your consideration.