Question
July 17, 2009
VIA E-MAIL
Mr. Michael B.Verne
Federal Trade Commission
Bureau of Competition
Premerger Notification Office
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Dear Mr. Verne:
Thisletter is a follow-up to our e-mail exchanges on July 14, 2009, regarding thereportability of a proposed transaction under the Hart-Scott-Rodino AntitrustImprovements Act of 1976 (as amended) (the ''HSR Act").
Summary ofTransaction
PartyA and one or more of its wholly-owned subsidiaries (collectively, "PartyA") manufacture and sell outdoor power equipment and related parts andaccessories (collectively, "Products") to distributors and dealers inthe United States and Canada. Party A generally sells its Products to dealersfor resale to end users. In certain circumstances Party A also sells productsto wholesale distributors who subsequently sell to retail dealers as well asend user customers. Most of its distributors, and certain of its dealers,obtain (i) "floor plan" financing for the purchase of equipment fromParty A through a wholly-owned subsidiary of Party A ("Party A CreditSub''), and (ii) "open account" financing for their purchase ofrelated parts, accessories, software and services from Party A. Most of thedealers obtain (i) "floor plan" financing for the purchase ofequipment from Party A through a third party ("Third Party FinancingCo.''), and (ii) "open account" financing for their purchase ofrelated parts, accessories, software and services from Party A. Party A has afinancing agreement in place with Third Party Financing Co. that facilitates"floor plan" financing for its dealers.
PartyA also sells Products to mass market retailers, to a distributor that is awholly-owned subsidiary of Party A, to distributors and dealers located outsideof the United States and Canada, and to governmental entities, on an "openaccount" financing basis, but those customers and the related "openaccount" financing are not subject to the proposed transaction at thustime.
Forpurposes of this letter, (i) "floor plan" financing transactionsinvolve those in which the invoiced amount for a certain piece of equipment isdue to Party A from Party A Credit Sub or Third Party Financing Co., asapplicable, when the equipment is sold; and (ii) "open account"financing transactions involve those in which the invoiced amount for parts,accessories, software or services is due to Party A within a specified periodof 30 to 90 days, as applicable (i.e., the commercially standard practice ofselling goods to customers on an accounts receivable basis).
Withrespect to sales made by party A to distributors or dealers that obtain"floor plan" financing from Third Party Financing Co., Party A shipsthe ordered equipment to the distributor or dealer and simultaneously sends theapplicable invoice to Third Party Financing Co., who then pays Party A theinvoiced amount. The distributor or dealer then has sole responsibility forpaying Third Party Financing Co. for the purchased equipment, along withinterest at an agreed upon rate. Party A does not guaranty the obligation of adistributor or dealer to repay Third Party Financing Co., although Party Aoften agrees to pay the interest charges that accrue during an initial periodfollowing the sale by Party A to its distributor or dealer and also agrees torepurchase a small percentage of the inventory financed by Third PartyFinancing Co. if that inventory is repossessed or otherwise returned to ThirdParty Financing Co. Party A Credit Sub provides "floor plan"financing to distributors and dealers on a substantially similar basis.
PartyA proposes to form a joint venture with Party B, a financial institution. Thejoint venture will be conducted through a limited liability company("JVLLC"), with Party A indirectly owning 45% of the membershipinterests in JVLLC and Party B indirectly owning the remaining 55% of themembership interests. Party A and Party B will contribute, in the aggregate,approximately 11% of the estimated cash required to enable JVLLC to provide"floor plan" financing to party A's distributors and dealers, andNLLC will borrow from either Party B or an affiliate of Party B the remainingapproximately 89% of the estimated required cash.
Afterthe formation of JVLLC, in one or more transactions, (i) Party A Credit Subwill sell to JVLLC all or substantially all of its "floor plan"financing receivables as well as related "open account" financingreceivables, and (ii) Party A will sell to JVLLC all or substantially all ofits "open account" financing receivables from customers who obtainfloor plan financing from Third Party Financing Co. The aggregate purchaseprice of "floor plan" receivables and "open account"receivables purchased by JVLLC from Party A Credit Sub and Party A, asapplicable (the "Purchased Receivables"), will be in excess of$65.2million, and generally will be equal to, or substantially equal to, the faceamount of the Purchased Receivables. After the purchase by JVLLC of thePurchased Receivables, (i) Party A Credit Sub will cease providing "floorplan" financing to Party A's distributors and dealers and will becontractually obligated to refer to JVLLC all distributors and dealers whorequest a "floor plan" financing arrangement, and (ii) JVLLC willexclusively provide the "floor plan" financing that Party A CreditSub used to provide. At that time JVLLC will also commence providing "openaccount" financing of parts and accessories for Party A's distributors anddealers.
Inaddition, Party A expects to terminate its agreement with Third Party FinancingCo. and, accordingly, the distributors and dealers of Party A that arecurrently obtaining "floor plan" financing from Third Party FinancingCo. will also obtain this financing through JVLLC. At such time, JVLLC mayattempt to acquire the existing portfolio of "floor plan" financingreceivables related to Party A's business from Third Party Financing Co. Atthat time, it is anticipated that the JVLLC would also commence "openaccount" financing of parts, accessories, software and services forsubstantially all of Party A's dealers located in the United States and Canada.
Followingthe conclusion of the transactions described in the two preceding paragraphs,Party A will continue to provide "open account" financing to itsmass-market retailer customers, a distributor that is a wholly-owned subsidiaryof Party A, its international (non-US and non-Canadian) distributors anddealers and its government entity customers.
The transactionsdescribed above are anticipated to occur over the next six months. The precisetiming and order of the transactions remains to be determined. However, theultimate result of the transactions described above is as follows:
Pre-Formation of JVLLC
Post-Formation of JVLLC
Party A Credit Sub provides "floor plan" JVLLC provides "floor plan" financing to most distributors and certain that party A Credit Sub currently provides retail dealers of Party A, in an aggregate and "open account" financing of parts, face amount of approximately accessories, software and services $102,051,000, and Party A provides "open presently provided by Party A account" financing for parts, accessories, software and services relating to equipment covered by Party A Credit Sub "floor plan" financing, in an aggregate face amount of approximately $17,474,000.
JVLLC provides floor plan financing that Party A Credit sub currently provides and open account financing of parts, accessories, software and services presently provided by Party A
Third Party Financing Co. provides "floor JVLLC will provide the "floor plan" plan" financing to many retail dealers of financing that Third Party Financing Co. Party A, in an aggregate face amount of currently provides, as well as "open approximately $177,400,000, and Party A account" financing of parts, accessories, provides "open account" financing for software and services that Party A parts, accessories, software and services currently provides. relating to equipment covered by Third Party Financing Co. "floor plan" financing, in an aggregate face amount of approximately $15,529,000.
JVLLC will provide the floor Plan financing that Third Party Financing Co. currently provides, as well as open account financing of parts, accessories, software and services that Party A currently provides.
Party A provides "open account" financing to its mass market retailer customers, to a distributor that is a wholly-owned subsidiary of Party A, to its international (non-US and non-Canadian) distributors and dealers and government entity customers, in an aggregate face amount of approximately $157,446,000.
Party A will continue to provide "open account" financing to its mass market retailer customers, to a distributor that is a wholly-owned subsidiary of party A, to its international (non-US and non-Canadian) distributors and dealers and to its government entity customers. Party A may, from time to time, also provide "floor plan" financing and "open account" financing for certain distributors and dealers if they are not accepted by JVLLC.
(All amounts setforth in the preceding table are rolling 12 month averages for the periodending June, 2009)
Analysis
Formation ofJVLLC
Theacquisition of membership interests in JVLLC by both Party A and Party B willbe exempt from the reporting requirements under the HSR Act because JVLLC willbe its own ultimate parent entity when it issues the membership interests toParty A and Party B, the acquisition price paid by each of Party A and Party Bfor the membership interests will be less than $260.7MM and JVLLC will haveless than $13.0MM in assets and sales at the time that Party A and Party Bacquire the membership interests.
Sale of the Receivables of Party A Credit Sub and Party Ato JVLLC
TheStaff has, in the past, taken the position that the sale of a portfolio ofloans (including credit receivables) will be exempt as a transaction in theordinary course of business under 7A(c)(1) of the HSR Act so long as theseller continues to be in the business of providing other forms of credit afterthe transaction.
Asnoted above, Party A currently sells Products (including finished whole goodequipment, parts and accessories) to mass market retailers, to a distributorthat is a wholly-owned subsidiary of Party A, to distributors and dealerslocated outside the United States and Canada, and to governmental entities onan "open account" basis, which is the commercially standard practiceof giving customers a fixed period of time, usually 30 to 90 days, to pay forthe products purchased. Virtually all other customers of Party A finance theirpurchases from Party A through "floor plan" financing through Party ACredit Sub (in the case of most distributors and certain retail dealers) orThird Party Financing Co. (in the case of most retail dealers). After formationof JVLLC and tile completion of the transactions described above, party ACredit Sub will cease providing "floor plan" financing to Party A'scustomers (except in certain limited circumstances, including those instanceswhere JVLLC does not accept the credit risk for certain distributors ordealers) and Third Party Financing Co. will cease providing "floorplan" financing to party A's customers. In each case, JVLLC will providethe "floor plan" financing that Party A Credit Sub and Third PartyFinancing Co, respectively, are currently providing. JVLLC will also provide"open account" financing for parts, accessories, software andservices currently provided by Party A for those customers to which eitherParty A Credit Sub or Third Party Financing Co. is providing "floorplan" financing. Party A will continue to provide "open account"financing to its mass-market retailer customers, a distributor that is awholly-owned subsidiary of Party A, its international (non-US and non-Canadian)distributors and dealers and its government entity customers.
Conclusion
Based on the aboveanalysis, you concluded that because Party A would continue to provide"open account" financing to certain of its customers after theformation of JVLLC, the sale by Party A Credit Sub of its portfolio of"floor plan" receivables and certain "open accountreceivables" to JVLLC did not cause Party A to "exit" the creditbusiness, and therefore the sale of the "floor plan" receivables byParty A Credit Sub to JVLLC and the sale of the "open account"receivables by Party A to JVLLC will be exempt from the reporting requirementsof the HSR Act as a transaction iu the ordinary course of business.
Please contact meif you find error in any of the above. Thank you for your time and assistance.