1209007 Informal Interpretation

Michael Verne

  - The proceeds of
the loan are not retiring debt, they are part of the consideration to Seller for
the 55% interest in Target LLC. We don't think you can prorate the amount by
the percentage that Seller is retaining in the LLC. Our call would be that
this is a $90 million deal, as that is the total amount going to seller in
exchange for the 55% membership interest that Buyer is receiving.





Tuesday, September 25, 2012 10:59 AM


Verne, B. Michael




Acquisition Price Question


I hopeyou are well. We have two questions regarding the valuation of debt in anacquisition of control over an LLC Our client (Buyer) is acquiring a 55%interest in Target LLC from Seller. The parties contemplate that priorto/simultaneous with the acquisition, Target LLC, with the assistance of Buyer,will borrow $75M from a third party and distribute the proceeds of the loan toSeller prior to the acquisition of the equity by Buyer. At closing, Buyer willacquire 55% of Target LLC for $15 million. Seller will retain a 45% interest inTarget LLC This structure was done for tax purposes, without consideration asto whether it would affect HSR filing obligations.

1. This scenario is similar to informal interpretation#91, in which the PNO determined that the value of the debt need not beincluded in the acquisition price. The only difference here is that theproceeds of Target LLC's third party loan will not be used to retire anintracompany debt between Seller and Target LLC. Instead, the proceeds of theloan will be provided to Seller through a dividend. In our situation, must theacquisition price include the Target LLC's newly-acquired debt if that loan isnot used to retire an intracompany debt?

2. If Target's LLC's newly-acquired debt should beconsidered as part of acquisition price, must Buyer include the entire value ofthe $75 million loan as part of the acquisition price? As a result of thetransaction, Seller will retain a 45% interest in Target LLC. Target LLC willbe responsible for the $75 million debt, but the profit distributions Sellerwill receive in the future from its 45% interest in Target LLC will necessarilybe reduced by the amount Target LLC pays in interest and principal. Seller'sfuture profits from Target LLC will be reduced as a result. If 45% of the $75million debt is not considered part of the acquisition price, the transactionwould fall below the $68.2 million size-of-transaction threshold.

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