Question
From:(redacted)
Sent:Tuesday, June 06, 2006 10:39 AM
To:Verne, B. Michael
Cc:(redacted)
Subject:HSR Analysis of Proposed Transaction
Mike,
This email is to confirm ourphone conversations with (redacted) regarding the analysis of a proposedtransaction for purposes of HSR filing requirements.
Facts
As we discussed, ourclient (the "Corporation"), is proposing to recapitalize anothercompany (the "Target"). The stock of the Target is currently owned by(i) a group of shareholders (including option holders) who are selling theirinterests in the Target (the "Selling Shareholders"), (ii) theCorporation, and (iii) a management shareholder of the Target who will transfera portion of his stock in Target to the Acquisition Co. (as defined below)(the"Management Shareholder"). The stock of the Target consists of twoclasses, voting common stock and nonvoting preferred stock. In addition to theoutstanding stock, there are a number of rights outstanding that areexercisable for common stock of the Target. We understand that the Corporationcurrently owns approximately 3.5% of the outstanding nonvoting preferred stockand 3% of the outstanding voting common stock of the Target (on a fully dilutedbasis), and the Management Shareholder currently owns 25% of the outstandingnonvoting preferred stock and owns or has rights to purchase approximately 20.5%of the outstanding voting common stock of the Target (on a fully dilutedbasis). The remainder of the outstanding stock and rights to purchase stock ofthe Target are held by the Selling Shareholders.
In the proposedtransactions described below, the Target's capital stock has an estimatedagreed value among the parties to the transactions described below of $90million, plus cash on hand (estimated at $4 million), less third party debt(estimated at $30.5 million), less transaction expenses, including certaincompensation payments triggered by the transaction (estimated at $2.5 million).Based on the estimates above, the agreed value of Target's capital stock is $61million, of which approximately $49 million is allocated to the voting commonstock of Target and approximately $12 million is allocated to the nonvotingpreferred stock of Target.
Formation of AcquisitionCo.
The Corporation willcontribute its preferred stock (with a deal valuation of approximately$450,000) and common stock (with a deal valuation of approximately $1.45million) in Target[l] <outbind://44/ # ftn1 > and approximately $21million in cash to a newly formed acquisition vehicle ("AcquisitionCo.") in exchange for nonvoting common stock in Acquisition Co. and awarrant to purchase supervoting Class C common stock of Acquisition Co. (the"Warrant"). The Corporation will have the right to exercise thisWarrant at any time to purchase a sufficient number of shares of Class C commonstock at fair market value to give the Corporation voting control overAcquisition Co. The Management Shareholder will contribute voting common stockof the Target to Acquisition Co. valued at approximately $3.3 million inexchange for voting common stock of Acquisition Co. In addition, certainemployees of the Target will contribute $1-2 million in cash[2]<outbind:l/44/# Jtn2> to Acquisition Co. in exchange for voting commonstock of Acquisition Co., and certain Selling Shareholders and the ManagementShareholder will collectively receive warrants, exercisable at fair marketvalue determined on the date of the formation of Acquisition Co., to purchasenonvoting common stock equal to approximately 5% of the fully diluted commonstock of Acquisition Co. The Management Shareholder will have voting control ofAcquisition Co. at the time these transactions are consummated by virtue ofowning more than 50% of the voting common stock of Acquisition Co. Thesetransactions are collectively referred to as the "Formation."
Issuance of Stock of Target
Acquisition Co. willcontribute approximately $21 million of cash and certain shares of nonvotingpreferred stock in the Target having a value of approximately $450,000 toTarget in exchange for Target issuing to Acquisition Co. new shares of votingcommon stock. These transactions are collectively referred to as the"Stock Issuance."[3] <outbind://44/#_ftn3>
Loan Transactions and StockRedemption
Concurrently with the othertransactions described above, Acquisition Co. and Target shall cause certainloans to be made to the Target and its subsidiaries in the approximateprincipal amount of $67 million (collectively, the "Loans")[4]<outbind://44/ftftn4> . The Target shall use certain of the proceeds fromsuch loans, the proceeds of the Stock Issuance and cash on hand to (i) pay downapproximately $30.5 million of existing debt of the Target, (ii) makecompensation and expense payments of approximately $2.5 million, and (iii)redeem all of the stock of the Target other than the stock held by AcquisitionCo. (through the stock issuance or the stock rollover contribution by theCorporation and the Management Shareholder) (collectively, the"Redemption") for aggregate consideration of approximately $55.8million (constituting the $61 million equity valuation less the $5.2 million inrollover equity contributed to Acquisition Co. by the Corporation and theManagement Shareholder), of which approximately $44.3 million will be paid toholders of the Target's voting common stock and rights exercisable therefore(for total consideration of approximately $49 million to holders of commonstock once the rollover equity contribution is considered), and $11.5 millionwill be paid to holders of the Target's nonvoting preferred stock (for totalconsideration of approximately $12 million to holders of nonvoting preferredstock once the rollover equity contribution is considered). After giving effectto the Loans and the Redemption, all of the outstanding stock of the Targetwill be held by Acquisition Co.
HSR Analysis
Based on ourconversations, we understand that the proposed transactions described above arenot reportable for HSR purposes because (i) none of the transactions includedin the Formation or the Stock Issuance meet or exceed the minimum filingthresholds under the HSR Act, and (ii) the Redemption is an exempt transactionunder the intraperson exemption described in Section 802.30 of the HSR Act, andthe acquisition price of the voting common stock acquired by the Target in theRedemption does not meet or exceed the minimum filing thresholds under the HSRAct.
We understand from theCorporation that the structure of this transaction has a legitimate businesspurpose, including certain regulatory restrictions on the Corporation'sacquisition of voting stock. The proposed transaction has not been structuredto avoid the filing requirements of HSR Act. However, if this transaction werestructured as a stock purchase by Acquisition Co. of all of the outstandingstock of Target, the transaction would be exempt from any HSR filing becausethe acquisition price of the existing voting stock of Target (includingoutstanding voting stock and rights to acquire the same) would be below the HSRfiling threshold. Based on the valuations used in the proposed transactionsdescribed above, if the transactions were restructured as a direct stockpurchase, Acquisition Co. would pay approximately $49 million ($90 million(enterprise value), plus $4 million (cash), less $30.5 million (debt), less$2.5 million (compensation and expense payments), less $12 million (nonvotingpreferred)) for all of the voting stock of Target.
We further understandthat the Corporation's exercise of the Warrant could result in a filingobligation under the HSR Act if the value of the voting stock of AcquisitionCo. acquired upon exercise of the Warrant would exceed the applicable HSRfiling threshold at the time of such filing.
Please confirm that thisletter accurately reflects our discussions and your conclusion that no HSRfiling is required in connection with this proposed transactions. As wediscussed, we would also like to confirm that your analysis does not change dueto the fact that the Management Shareholder ends up owning more than 50% of thevoting stock of Acquisition Co.