Question
March 4, 2004
Michael Verne
Premerger Notification Office
Bureau of Competition
Room 303
Federal Trade Commission
600 Pennsylvania Avenue, N. W.
Washington, D.C. 20580
Re: HSR Phone Inquiry
Dear Mike:
This letter confirms our telephoneconversation last week in which I asked you whether an acquiring entity wouldsatisfy the size of person test under the following facts:
This isan acquisition by a newly-formed LLC of voting securities in a company which isa wholly-owned subsidiary of A. The LLC, which is its own UPE, does not have abalance sheet. The members of the LLC each have previously received bridgenotes from A which remain unpaid1. The total amount due under thesenotes is approximately $60 million. Essentially, the members of the LLC will becontributing their outstanding notes to the LLC, and will receive membershipinterests in the LLC which are proportional to the amount of the notes theyheld. These notes, along with a small amount of cash (also contributed by theLLC members) that will be used for the acquisition, will be the sole assets ofthe LLC. The total consideration for the acquisition is approximately $65mullion. Of this amount, approximately $60 mullion will be "paid"through the cancellation of the bridge notes and forgiveness of fees due under anotherloan facility to A. Only a small amount, less than $5 million, will be paid to Ain cash.
My question to you was whether the notes that arebeing contributed to the newly formed LLC would be considered to be assets ofthe LLC so as to satisfy the $10 million size of person test, or whether theywould be considered in the same manner as cash which is to be used for the acquisition,so that, pursuant to g 801.11, the LLC would not be deemed to have assetsgreater than $10 million.
You advised me that these notes would be treatedin the same manner as cash to be used by an acquiring person as considerationfor the acquisition of voting securities, and, therefore, that the LLC will notmeet the size of person test under these facts.
I also asked you how the size of the transactionwould be valued if, in the alternative, instead of having all of theoutstanding notes cancelled as in the prior example, A assigned some portion ofthe notes to the sub, and the LLC acquired the sub with the portion of thenotes assigned to the sub remaining outstanding. For example, A would transferapproximately $55 million of the notes to the sub and as consideration for thevoting securities of the sub, the LLC would cancel the remaining $5 million ofnotes owed by A as well as approximately $500,000 in outstanding fees underanother loan facility and make a cash payment to A of approximately $4.5million. The result of this would be that following the acquisition of the subby the LLC, the LLC would have paid consideration of approximately $10 millioni11 cash and debt cancellation, and hold the voting securities of a companywith approximately $55 million of debt. You said that you did not see anyreason why this structure would not be governed by the standard rule, which isthat when valuing the size of an acquisition of voting securities, the value ofthe debt held by the acquired entity is not included in the acquisition price.Thus, under this second scenario, the acquisition price would be deemed t0 beapproximately $10 million and would therefore fall below the HSR size of transactionthreshold2.
Footnotes:
1. As we discussed, thistransaction would not be exempt under 802.63 because it appears that the loanswere extended after it became publicly known that A was experiencing financialproblems.
2. The figures I used as examples in our telephoneconversation were slightly different, but the amounts in this letter moreaccurately reflect the current thinking regarding the proposed structure ofthis acquisition.
If Ihave not accurately reflected the substance of our conversation, or if you haveany further questions, please let me know.