Question
August 22, 2001
B.Michael Verne
Federal Trade Commission|
Bureau of Competition
Premerger Notification Office
Room 303
6th St and Pennsylvania Ave, N.W.
Washington, DC 20580
Re:Senior Living Facility Transaction
DearMichael:
Thisletter is to confirm our conversation yesterday. I described for you thefollowing transactions:
1.A real estate investment trust ("REIT") proposes to acquire the stockof a corporation (SLF) which owns, directly or indirectly, anumber of senior living facilities. The assets and stock of SLF have fairmarket values significantly in excess of $200 million. The senior livingfacilities include, in almost all cases, assisted living units and, in mostcases, units which provide special care or skilled nursing services similar tothose which might be provided in a nursing home. The senior living facilitiesare all managed for SLF by a third party manager ("Manager") underlong term contracts.
2.In the past, REIT has made certain investments in healthcare properties whichhave become defaulted. In connection with the resolution of those investments, REITformed a subsidiary ("OpCo") to hold the stock or membershipinterests of corporations or LLC's formed to serve as the licensed operator ofcertain healthcare facilities. The properties operated by OpCo are managedunder agreement by a third party manager (HC Manager). REITproposes to "spin out" ownership of OpCo pro rata to REIT'sshareholders. Prior to the spin out, Opco will enter into leases of all therelated real property, which will remain owned, directly or indirectly, by REIT.For purposes of this analysis, it is assumed that the fair market value of OpCo'sassets at the time of the spin out will exceed $50 million. At the effectivedate of the spin out, the shareholders of REIT and the stockholders of OpCowould be identical, with no shareholder owning an interest greater than 9.9% ineither entity. Initially, there would be a significant overlap between theboards of the two companies. The shares of OpCo would become publicly tradedand, accordingly, the two companies' shareholders may differ increasingly astime passes.
3.Immediately following the spin out, HC Manager would be merged with and into OpCo.The assets and stock of HC Manager will have a fair market value at the time ofthe merger which is substantially less than $50 million.
4.Prior to the spin out of OpCo, REIT proposes to enter into an agreement with OpCopursuant to which contemporaneously with the acquisition of SLF by REIT, REITwill lease the real property (the "SLF Realty") used for all thesenior living facilities owned by SLF to OpCo. The agreement would also providefor the contemporaneous transfer to OpCo of the operating assets of SLF whichare not incidental to the ownership of the SLF Realty (the "Other SLFAssets"). The Other SLF Assets include the personal property used inconnection with the operation of the skilled nursing units and the long termcontracts with Manager (which are expected to continue in force). The Other SLFAssets have a fair market value of less than $50 million.
Asdiscussed, for purposes of the analysis, I assume that all relevantsize-of-party tests have been met.
Youconcurred in my analysis that these transactions could be consummated withoutpremerger notification. More specifically,
(a) A pro rata spin out, such as that proposed for OpCo, isexempt from premerger notification
(b) Under the circumstancedescribed above, the merger of HC Manager into OpCo is exempt from notificationbecause the size-of-transaction test is not met.
(c) Under the circumstancesdescribed above, the acquisition of SLF by REIT is exempt from
notification under 802.4 and 802.5.
(d) The transfer of the Other SLFAssets to OpCo is exempt from notification, either as part of the spin outtransaction or because it otherwise fails to satisfy the size-of-transactiontest.
Atyour convenience, please call me at (redacted) if you wish to discuss any ofthis further or to confirm that I have accurately reported our discussion.