Question
From:(redacted)
Sent: Thursday, March 13, 2008 12:01 PM
To:Verne, B. Michael
Cc:(redacted)
Subject: HSR Analysis For 2:30pm (EST) Call with Mike Verne
DearMike:
Inadvance of a teleconference that (redacted) hasscheduled with you at 2:30pm (EST) today, (redacted)and I thought it made sense to send you a short note to lay out our analysis andunderstanding of the applicable HSR rules/regulations surrounding the so-called"warehouse exemption" and a related valuation methodology question. (redacted)represent the interests on the selling side of the transaction, while my firmrepresents the buying side. Briefly, as follows:
ProposedTransaction
Pursuantto a proposed transaction, my client, the Acquiring Person, intends to purchase79.3% of the interests of an entity organized as a Maryland Real EstateInvestment Trust (the "Company"). My client, the Acquiring Person,already owns 20.7% of the existing interests of the Company, and following thistransaction, will own 100% thereof. The businesses and assets to be acquired(the "Target Businesses") consist primarily of owned and leased coldstorage warehouses within the United States and the provision of cold storageand related services to the food industry in such warehouses. The TargetBusinesses also include services incidental to the operation of thesewarehouses, including: freight handling (the loading and unloading of vehiclesbringing freight to and from the warehouses), storage, blast freezing, freightconsolidation, packaging and non-asset-based logistics services (e.g. theCompany arranges on behalf of its warehouse customers, for a fee, for thedistribution of warehoused goods using third-party distribution channels). Theacquisition of the owned and leased warehouses, and the assets incidental tothe ownership of the real property interests in such warehouses is exempt underthe HSR Act's Warehouse Exemption, 16 C.F.R. 802.2(h). However, the Target Businesses also includebusinesses the acquisition of which is not exempt under such WarehouseExemption, including a quarry business, an asset-based distribution servicesbusiness and a business involving the management of third-party warehouses inwhich the Company does not have any real property interest.
Theacquisition price of the interests in the Company to be acquired in theproposed transaction exceeds $340 million. Additionally, the fair market valueof the existing 20.7% interest owned by the Acquiring Person is approximately$86 million based on the value being paid for the 79.3% interest in theproposed transaction. Per Section 801.10(d) of the HSR regulations, for purposesof our analysis of reportability of the proposed transaction under the HSR Act,the value of the non-corporate interests to be held as a result of the proposedacquisition is, therefore, approximately $426 million (i.e. the sum of theacquisition price of the interests to be acquired and the fair market value ofthe interests in the same entity already owned by the Acquiring Person).
The Acquiring Person hasconducted a fair market valuation with respect to the portion of thetransaction that is exempt under the HSR Act's Warehouse Exemption and withrespect to the portion of the transaction that is potentially reportable. Specifically,the Acquiring Person, for purposes of its fair market valuation, hascategorized each business unit within the Target Businesses as either exempt ornon-exempt under the Warehouse Exemption. Under the fair market valuation, thevalue of the non-exempt business units, those that would not consist solely ofwarehouses and assets incidental to theownership of warehouses, will not inaggregate exceed $63.1 million, the HSR size-of-transaction threshold.
The Acquiring Person conducted its fair marketvaluation in the following manner. First, the Acquiring Person treated the fairmarket value of all of the Target Businesses taken together as equal to thepurchase price (i.e. approximately $340 million) because that is the arm'slength negotiated transaction price for which the interests in the Company arebeing transferred. It is worth noting that, although the Company has in excessof $1.0 billion of indebtedness which will remain outstanding following theconsummation of the proposed transaction, we understand that the PNO'slong-standing position has been that the dollar value of liabilities of theTarget Businesses is not aggregated with the purchase price in calculating thesize-of-transaction, and therefore the acquisition price for the interests inthe Company must not include the amount of this indebtedness. Next, eachbusiness unit was valued based on a net present value, NPV, of cash flowexpected to be generated by that business unit over a multi-year period. TheNPV of each business unit was then divided by total NPV of all the businessunits to determine the percentage of the total value that each business unitcomprised. The percentages were then totaled for the non-exempt components todetermine the percentage of total value comprised by the non-exempt businessunits. The percentage of total value comprised by the non-exempt business unitswas then multiplied by the purchase price to determine the fair market value ofthe non-exempt components.
AcquiringPerson performed its valuation on a business unit-by-business unit basis ratherthan on an asset-by-asset basis because it values the businesses based on the cashflows expected to be generated by them, not based on the value of individualassets.
OurAnalysis
Ourconclusions of this transaction indicate the following:
The transaction described above is exempt under theHSR Act.
The fair market valuationmethodology described above is an acceptable way to conduct the valuation for HSR Act purposes.
The acquisition of warehouses and theassets incidental to the ownership of the real property interests in suchwarehouses described above is exempt from the HSR Act pursuant to 802.2(h),notwithstanding the exception in the Warehouse Exemption (to the effect that awarehouse acquisition is not exempt "whenthe ...warehouse is to be acquired in an acquisition of a business conducted onthe real property"). That exception to the Warehouse Exemption doesnot apply where, as here, the business conducted on the real property is itselfthe operation of a warehouse and services incidental to warehousing. Thevarious services offered by the Company's warehouse business are consideredincidental to the warehouse business and do not change the fact that theWarehouse Exemption is available for the acquisition of the real propertyinterests in such warehouses and the assets incidental to ownership thereofassets.
Exempt assets incidental to theownership of warehouses include: lift trucks, fork lifts, refrigerationequipment, racks, assets for food preparation/packing services and customsrelated services. We also understand that exemptassets incidental to the ownership of the warehouses include other assets usedto offer the various services described in this letter.
Pursuant to 16 C.F.R. 802.4, the Warehouse Exemption remains applicable whether the transaction isstructured as the acquisition of non-corporate interests (e.g., the acquisitionof units of a Maryland Real Estate Investment Trust) or the acquisition ofvoting securities.
Please let us know if youdisagree with any of the conclusions discussed above, or if we havemisunderstood any aspect of the relevant HSR rules/regulations. Thank you inadvance for your time and attention in this matter, and we look forward tospeaking with you later today.