LBOs and the size of transaction test

The Premerger Notification Office is often asked to give guidance on how to determine the value of a proposed merger or acquisition in light of the size of transaction test. The size of transaction test excludes transactions from the reporting requirements of the Hart-Scott-Rodino Act if they are valued below the annually adjusted dollar threshold. The current size of transaction threshold is $78.2 million.

Questions often arise when determining the proper size of transaction in LBOs, or leveraged buyouts. LBOs are transactions in which new debt — taken on by either the buyer or the target and using the target as collateral — is used to finance the buyer's acquisition of the target. The new debt is intended to be used specifically to finance the transaction at issue — that is, but for the transaction, the new debt would not have been taken on by the buyer or the target.

In the past, PNO guidance in the LBO context tied reportability to which party incurred, provided or guaranteed the new debt. If the buyer (or any entity within the buyer) incurred, provided or guaranteed the new debt, the new debt counted towards the size of the transaction. But if the target incurred, provided or guaranteed the new debt, the new debt did not count towards the size of transaction. This advice resulted in different size of transaction calculations depending on whether the buyer or the target took on the new debt, even though the new debt served the same purpose in both situations — financing for the acquisition.

PNO’s updated position:  new debt used to finance LBOs is always included in the size of transaction calculation.

Going forward, the PNO is revising its guidance on the size of transaction calculation in the LBO context to ensure consistent results. Starting now, new debt used to finance an LBO transaction, whether taken on by the buyer or the target, is to be included in the size of transaction. Typical deductions from the size of transaction, such as for retiring pre-existing debt and for transaction expenses, are still permitted, but the balance of the new debt must be included in the size of transaction.

Here are some examples of how to calculate the size of transaction using the new approach:

  1. PE Fund will acquire 100% of X's voting securities for $500 million. PE Fund has $200 million cash available to finance the transaction and will create “Acquisition Vehicle.” Acquisition Vehicle will take on a new $300 million loan for a moment in time before merging with X, with X then holding the debt. In addition, X has $200 million of pre-existing debt, which will be retired in connection with the acquisition. The size of transaction is $300 million: $200 million PE Fund's cash + $300 million PE Fund's loan - $200 million X's retired debt.
     
  1. PE Fund will acquire 100% of X's non-corporate interests for $500 million. PE Fund has $100 million cash available to finance the transaction. X will take on a new $400 million loan. In addition, X has $150 million of pre-existing debt, which will be retired in connection with the acquisition, and transaction expenses of $10 million will be incurred. The size of transaction is $340 million: $100 million PE Fund's cash + $400 million X's loan - $150 million X's retired debt - $10 million in transaction expenses.
     
  1. PE Fund will acquire 80% of X's voting securities for $600 million. PE Fund has $300 million cash available to finance the transaction. X will take on a new $300 million loan. X has $0 pre-existing debt. The size of transaction is $600 million: $300 million PE Fund's cash + $300 million PE Fund's loan.

As of this posting, all prior guidance that does not require the inclusion of new debt in the size of transaction in the LBO context is rescinded, and informal guidance on our website will be updated accordingly.

If you have questions about this change, or other issues related to HSR filing requirements, contact the PNO.

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