Question
December 1, 2004
Via Electronic Mail
Michael B. Verne
Premerger Office
Room 301
Federal Trade Commission
6th and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Dear Mr. Verne:
Thisletter is to confirm the conclusions we discussed in our telephone conversationof Wednesday, November 24, 2004 concerning whether thetransaction described below would trigger the premerger notification and filingrequirements of the Hart-Scott-Rodino Act (the "Act" or "HSR").
CompanyB is currently in Chapter 11 bankruptcy reorganization. As. part of thereorganization plan, Company A is proposing to purchase from Company B sixgates at an airport and certain aircraft hangar improvements. Company A willalso assume an aircraft hangar lease from Company B, and the lease obligationfor the six gates. The proposed purchase price for these items is $40 million.
CompanyA has also proposed to provide a $57 million debtor-in-possession("DIP") loan to Company B. The DIP loan may be refinanced with an $87million long-term loan as part of the reorganization plan. A portion of theabove-mentioned, long-term financing package may be convertible into non-votingcommon stock in "re-organized" Company B, with conversion occurringas early as the time of approval of the plan of reorganization.
Theparties would also agree to negotiate certain code sharing agreements (worthpotentially between $150 million and $250 million), potential frequent flyerarrangements, and other ancillary, less material operating agreements.
Itis my understanding that an HSR filing will not be required. The DIPloan and permanent financing will be excluded from valuation of the transactionunder the HSR Act, as they are arms-length loans, madeat current interest rates, created with the expectation of either being repaidor converted into non-voting securities. (Although the loan terms are atarms-length market rates, the debtor may have difficulty obtaining a similarloan under its current circumstances.) Neither a standard market rate loan northe acquisition of non-voting securities are reportable events. Therefore, tothe extent that the loans are made under market conditions, they are exemptfrom consideration. Similarly, conversion of the DIP loan or permanentfinancing into non-voting securities would not require inclusion of the loanvalue in the value of the transaction for HSR purposes.Non-voting securities are not considered "voting securities" underSection 801.1(f)(1) of the HSR Act, 16 C.F.R. 801.1(f)(1). On theother hand, if the loan ends up being made on less-than-arms-length terms orbeing converted into voting securities, the value of such favorable terms or ofsuch converted voting securities would be included in any valuation of theacquisition. Such features are not currently part of the transaction's terms.
Finally,the value of the code-sharing arrangements will not be included as part of theacquisition price. As these arrangements permit each airline to book passengerson certain flights of the other airline, they are considered operating agreementsand not "assets" under the HSR Act. Thetotal pertinent value of the transaction would, therefore, be approximately $40million, relating to the purchase price of the gates and hangar improvements.The transaction therefore does not meet the $50 million size-of-transactionthreshold and will not require a filing.
Pleaselet me know if you have any questions. Thank you very much for your help.