Question
December 20, 2007
B. Michael Verne
Premerger Notification Office
Federal Trade Commission
Bureau of Competition, Room 303
6th& Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re:Joint Venture Formation HSR Analysis
Dear Mr. Verne:
The owners of two businesses and a private equity company("PE") are proposing to combinethe two companies into a new company ("Newco") that willbe jointly owned by the owners of the current businesses and PE.
The first business is comprised of two corporations,Company Al and Company A2, controlled by the same individual,"A-UPE," who holds 80% of the stock of Al and A2. (The remaining 20%of the stock of Al and A2 is held by another individual unaffiliated with A-UPE.)In addition to its U.S. operations, Al holds a 90% interest, including thegeneral partnership interest, in a Canadian limited partnership with operationsin Canada. The total value of the stock of Al and A2 is estimated to be about$200 million.
The second business is comprised of one corporation,Company B, controlled by one individual "B-UPE" who holds 52.04% ofthe stock of B. (The remaining 47.96% of the stock of B is held by familytrusts and other affiliated persons of B-UPE (7.14%) and five individualsunaffiliated with B-UPE (40.82%)). The total value of the stock of B isestimated to be about $85 million.
In creating Newco, theparties would take the following steps (all of these steps will occursimultaneously):
1. Newco and three Newco Subs, all Delaware Corporations,will be formed by the PE. Newco will have two classes of stock: (1) common,($10/share), and (2) Series A Convertible Preferred Stock ($30/share) which isconvertible into common at any time at theoption of the holder on a one-for-one basis and which has the right to votewith common on an as-converted basis on any matters presented to thestockholders.
2.The two shareholdersof Al and A2 will contribute all of their shares in the two companies to Newcoin exchange for (i) $120 million in cash (adjusted for any outstanding thirdparty debt and capital lease obligations that had not been retired prior to the transaction and also subject to certainworking capital adjustments), (ii) 2 millionshares of Newco Series A Convertible Preferred Stock (voting) valued at $60 million, and (iii) 2 million shares of Newcocommon stock valued at $20 million. Assuming full exercise of theManagement Subscriptions Rights, A-UPE would hold securities representing 31.62% of the Newco voting rights and theother shareholder of Al and A2 would beentitled to 7.90% of the Newco voting rights.
3.All shareholders ofB will contribute a portion of their shares (valued at $30 million) to Newco inexchange for (i) 666,667 shares of Newco Series A Convertible Preferred Stock(voting) valued at approximately $ 20 million, and (ii) 1 million shares ofNewco common stock valued at approximately $ 10 million. Assuming full exerciseof the Management Subscription Rights, B-UPE would hold securitiesrepresentation 8.6% of the Newco voting rights and the other shareholders of B(in the aggregate) would be entitled to 7.9% of the Newco voting rights.
4.Shareholders of B will sellapproximately $35 million worth of shares of Company B to PE for cash and will sell approximately $20million worth of shares of Company B to Newcofor cash.
5.The PE will contribute the $35million in company B stock it just bought from B shareholders along with $5million in additional cash to Newco in exchange for 4 million shares of Newcocommon stock. Assuming full exercise of the Management Subscription Rights thiswould represent 39.53% of the Newco voting rights at closing.
6.Two of the new Newcoofficers neither of whom are shareholders in Al, A2 or B, will receive 350,000Restricted Shares of Newco Common Stock, which will vest over a four yearperiod. The value is approximately $ 3.5 million. Each of the two Newco officers would also have the right to purchaseup to $500,000 worth of Newco common stock(collectively, the "Management Subscriptions Rights") and would be grantedan option to purchase one share of Newco common stock (at an exercise price of $10 per share) for each share of Newcocommon stock purchased by such officer.Management would be entitled to 4.45% of the Newco voting rights at closingassuming full exercise of the Management Subscription Rights.
7.Newco will take outnew bank debt of $135 million.
8.The Board of Directors willconsist of five members. A-UPE will designate one, BUPE will designate one,the PE will designate one, the Newco CEO will be on the board and the finalmember will be an outside director mutually agreed upon by the other four (thiswill be set out in the stockholders' agreement).
At the conclusion of the transactions described above andassuming the full exercise of the Management Subscription Rights, Newco wouldhold, indirectly, all of the voting securities of Al, A2 and B (all of theentities would continue to exist as either direct or indirect subsidiaries ofNewco), and the shareholders would hold the following Newco shares:
Common
Shares (millions)
Value (millions)
Percent of class
A-UPE
1.60
$16.0
21.48
Other shareholder of Al and A2
0.40
4.0
5.37
B-UPE
0.52
5.2
6.98
Other shareholders of B
0.48
4.8
6.44
Private Equity
4.00
40.0
53.69
Management
0.45
4.5
6.04
Total Outstanding
7.45
$74.5
100
Series A Convertible Preferred Stock*
Shares (millions)
Value (millions)
Percent of class
A-UPE
1.60
$48.0
60
Other shareholder of Al and A2
0.40
12.0
15
B-UPE
0.35
10.4
13
Other shareholders of B
0.32
09.6
12
Total Outstanding
2.67
$80.0
100
Percent of voting securities:
*This series votes with common on a one-for-one basis.
Newco Voting Rights at Closing
Votes (millions)
Percent of Voting Securities
A-UPE
3.20
31.62
Other shareholder of Al and A2
.80
7.90
B-UPE
.87
8.60
Other shareholders of B
.80
7.90
Private Equity
4.00
39.53
Management
.45
4.45
Total
10.12
100
As we discussed with you on the phone earlier thisweek, we analyzed this under Rule 801.40,"Formation of joint venture or other corporations." PE, A-UPE andB-UPE are forming a joint venture company, Newco. A-UPE and the other Ashareholder are contributing all of Company A's stock worth $200 million inexchange for $120 million in cash and $80 million worth of Newco votingsecurities. (A-UPE, A's largest shareholder, will receive $64 million of theNewco voting securities.) B-UPE and the other B shareholders are selling $35million worth of Company B stock to PE and contributing the rest of the CompanyB to Newco (worth $55 million) in exchange for an additional $25 million incash and $30 million of Newco voting securities. PE will purchase Company B stockworth $35 million from B-share holders and then contribute the Company B stockand $5 million in cash to Newco in exchangefor Newco voting securities worth $40 million.
Under 801.40, all persons contributing to the formationof a joint venture are deemed to beacquiring persons only, with the joint venture deemed to be the acquiredperson. So PE and all A and B shareholdersare acquiring persons with Newco as the acquired person. AUPE must file beforeit acquires its Newco shares because it will receive and hold Newco votingsecurities valued at approximately $64 million. It will be required to pay a$45,000 filing fee. Pursuant to the exemption set forth in 802.41, Newcowill not be required to make an HSR filing. Allof the other acquiring persons will hold Newco voting securities with a valueof less than $59.8 million, the current size-of-transaction threshold, andtherefore need not submit HSR filings.
Please confirm that thisanalysis is correct. If you have any questions, please do not hesitate to call.