Question
From:(redacted)
Sent:Thursday, February 01, 2007 2:40 PM
To:Verne, B. Michael
Subject:Question re: Exclusion of Value of Disputed Bankruptcy Claim
Mike,
Thankyou very much for talking with me this morning about the bankruptcy claimvaluation issue. To confirm my understanding of our discussion, I will set outthe facts in more detail, as follows:
1. Buyer and Seller are both pending in Chapter 11bankruptcy proceedings.
2. Seller filed a claim in Buyer's bankruptcy proceeding for approximately$253 million, representing pre-petition amounts allegedly owed by Buyer toSeller under a pre-petition services agreement, plus damages resulting fromBuyer's alleged breach of the agreement. Buyer disputes the amount of the claimand, absent the current purchase agreement, would have objected to the amountof the claim in bankruptcy proceedings. Buyer acknowledges, however, thatSeller has a legitimate claim in Buyer's bankruptcy in the amount ofapproximately $110 million.
3. Buyer agreed to purchase 100% of the voting securities of Seller inconnection with a Plan of Reorganization proposed by Seller. The Stock Purchaseand Reorganization Agreement (the "Agreement") provides that, inexchange for the shares, Buyer will stipulate with Seller to a claim in Buyer'sbankruptcy case in an amount equal to $145 million and will provide up to $10million to Seller for the payment of administrative claims in Seller'sbankruptcy case. In addition, in order to obtain the consent of Seller's soleshareholder, Buyer agreed to assign to the shareholder its claim in Seller'sbankruptcy case in the amount of $7.3 million.
4. Seller liquidated the $145 million claim in Buyer's bankruptcy case byentering into a forward contract with a third party under which the purchaserof the claim paid Seller approximately 80 cents on the dollar for the claim. Underthe Agreement and Seller's Plan of Reorganization, the proceeds of the claimwill be used to pay creditor's claims in Seller's bankruptcy case with anyexcess amount to be distributed to Seller's shareholder.
5. Buyer has valued the Seller's assets that it will acquire as part of thestock sale at approximately $35 million. Buyer's valuation did not take intoaccount the value of Seller's claim in Buyer's bankruptcy (the proceeds ofwhich will remain in the Buyer's estate for distribution to its creditors andshareholder and will not be retained by the reorganized Seller which Buyer isacquiring). This $35 million value represents the value of the property, plantand equipment owned by the reorganized Seller at closing and the present valueof the profit that Seller would have earned on its restructured contract withBuyer over the term of that contract (four years).
Youagreed with our conclusion that in making a fair market value determination ofSeller for HSR purposes, Buyer does not need to take into account the value ofSeller's claim in Buyer's bankruptcy, or the agreed upon amount of that claim.
Could you kindlyconfirm that you are in agreement with this conclusion? If you have anyquestions about the facts, please give me a call.