Question
From: (redacted)
Sent: Monday, May 11, 2009 5:28 PM
To: Verne, B. Michael
Cc: (redacted)
Subject: RE: HSR question Under 801.10
Dear Mike-
In follow up to our conference call thisafternoon, we discussed the exclusion of certain debt for purposes ofdetermining if a transaction met the size of transaction test.
The transaction contemplated involves theacquisition from the Seller of 100 percent of the voting securities of anon-publicly traded U.S. issuer (the "Target") under 801.10.
The consideration to be paid by Buyer for thesecurities is determined and equal to
(1) $67.5M reduced by (2) $17M in outstandingindebtedness of the Target owed to a third-party lender, which indebtednesswill be paid off by the Buyer at Closing plus (3) up to approximately $7.3M forcash balance and working capital adjustments. Thus, total consideration paid tothe Seller will be between $50.5M and $57.8M.
The $17M in liabilities of the Target and itssubsidiaries represents a current debt of the Target (and its predecessorholding company) to be paid to a third party bank. (References throughout thisparagraph to Target shall include its predecessor holding company.) It is thedebt of the Target for a variety of reasons, as we will describe, and thus itsassumption is excludable from the size of transaction calculation under existingHSR interpretations by the PNO, including Informal Interpretations 88 and 91.These reasons include the fact that the debt is in the name of the Target, itis used for purposes related to the Target's business, and Target has paid downthe debt and related interest payments.
In order to confirm certain financial links to theSeller do not alter the characterization of Target's debt, we do want toprovide some additional background on this debt. The liability was originallyincurred when Seller bought the operating companies and their predecessorholding company for approximately $52M. The Seller and the Target each borrowed$26M to finance the transaction from separate third-party lenders. Each of theloans is evidenced by separate loan credit agreements. However, the term loancredit agreement representing that portion of the debt to the Target (the"Target Loan Agreement") contains terms and conditions that are tiedto covenants and terms in the senior credit facility agreement ("SeniorFacility Agreement"), including, but not limited to, containing certaindefined terms that are defined in the Senior Facility Agreement, having certainleverage ratio covenants, which establishes the rate of interest charged underthe Target Loan Agreement, defining what constitutes a default to include thosedefaults under the Senior Credit Facility Agreement, and certain othermeasurement covenants all based upon those contained in the Senior FacilityAgreement. Moreover, the requirement of the agent bank to lend funds to theTarget was conditioned on (i) all of certain facility loans under the SeniorFacility Agreement being fully utilized on the closing date thereof, (ii) thatcertain other conditions in the Senior Facility Agreement were satisfied, and(iii) that certain representations and warranties made under the SeniorFacility Agreement were true and correct and reaffirmed. Seller's debt and theTarget Loan Agreement is secured and cross-collateralized by the securities andassets of all companies related to the Seller under pledges andcross-guarantees of affiliated entities, in addition to the Seller and theTarget pursuant to a general security agreement for the Senior FacilityAgreement to Seller's lenders. The Senior Facility Agreement designates leadbanks and separate agent banks to identify the specific third party lender foreach loan made under the Senior Facility Agreement. The Seller and the Targethave each separately paid portions of the respective loans and relevantinterest charges (with the Target's current amount owed under the Target LoanAgreement being approximately $17M).
(Part of the $50.5-57.8M consideration being paidby Buyer will go to payoff a portion of the Seller's current indebtedness toits banks under one or more loans under the Senior Facility Agreement. But itis not necessary to determine whether or not that is a debt of the Target"paid to a controlling shareholder of the Target for purposes of determiningreportability here, as we are including it in the presumptive consideration.)
Thus, under 801.10 and Informal Interpretations 88and 91 (and Informal Staff Opinions 0803012 and 0805010), it appears that the$17M in liabilities assumed by the Buyer are those of and related to the Target(and not its parent, which is the Seller, or any other affiliated entity). Eventhough such $17 million of the Target Loan Agreement is part of a series ofseparate loans under the Senior Facility Agreement, and the Target LoanAgreement incorporates many of the terms and conditions contained therein, andis cross collateralized and secured by all other entities who are borrowers orguarantors under the Senior Facility Agreement, the principal balanceoutstanding under the Target Loan Agreement is attributable solely to theTarget and therefore reduces the purchase price to $50.5-57.8M. As such thesize of the transaction contemplated herein falls below the current $65.2M sizeof transaction valuation threshold and would not be reportable based on thefacts set forth above.