UPDATE October 11, 2016 : The below interpretation, as it relates to valuing a leveraged buyout transaction, is no longer the position of the PNO. Please see the PNO’s clarified position, found at "LBOs and the Size of Transaction Test."
(Redacted)- on first blush (Redacted) description sounded like more than merely arranging (esp. "doing everything"). We didn't realize that we had made such a bright line distinction on the arranging of the loan. That said, we need to be consistent with the April 4, 2012 position unless we have some good basis for changing it, so we stand corrected. Do not include the Joan proceeds. Thanks for keeping us on our toes.
Question
From: Verne, B. Michael
Sent: Tuesday, June 24, 2014 10:24 AM
To: (Redacted); Walsh, Kathryn E.
Subject: RE: Question Regarding Leveraged Acquisition
(Redacted)- on first blush (Redacted) description sounded like more than merely arranging (esp. "doing everything"). We didn't realize that we had made such a bright line distinction on the arranging of the loan. That said, we need to be consistent with the April 4, 2012 position unless we have some good basis for changing it, so we stand corrected. Do not include the Joan proceeds. Thanks for keeping us on our toes.
From: (Redacted)
Sent: Tuesday, June 24, 2014 9:59 AM
To: Verne, B. Michael; (Redacted); Walsh, Kathryn E.
Subject: RE: Question Regarding Leveraged Acquisition
Mike,
I apologize for jumping in, but because this is a typical LBO scenario, I would appreciate your clarification. Although the buyer is arranging the financing, the buyer is not incurring the loan, making the loan or financing the loan. This is no different than the April4,2012 advisory attached to (redacted) e-mail or advisory 0801014. In both cases, the buyer arranged the loan, but that did not make it part of the transaction value. Indeed, in the April 4, 2012 advisory, the PNO stated "Merely arranging the financing is not enough." Please help me understand how this transaction is different.
(Redacted)
From: Verne, B. Michael [mailto: MVERNE@ftc.gov]
Sent: Tuesday, June 24,2014 9:51AM
To: (Redacted); Walsh, Kathryn E.
Cc: (Redacted)
Subject: RE: Question Regarding Leveraged Acquisition
(Redacted)- based on that, we think that the buyer is involved enough in the loan process to require including the loan proceeds as part of the size of transaction.
From: (Redacted)
Sent: Tuesday, June 24, 2014 9:49AM
To: Verne, B. Michael; Walsh, Kathryn E.
Cc: (Redacted)
Subject: RE: Question Regarding Leveraged Acquisition
Mike-
My corporate colleague tells me that Buyer essentially is "doing everything" to put the loan in place-- identifying potential lenders, selecting the lenders, negotiating the commitment/indication of interest letters,and negotiating the final terms of the credit agreement.
(Redacted)
From: Verne, B. Michael [mailto:MVERNE@ftc.gov]
Sent: Tuesday, June 24, 2014 9:35AM
To: (Redacted).;Walsh, Kathryn E.
Cc: (Redacted)
Subject: RE: Question Regarding Leveraged Acquisition
(Redacted) -what specifically is the buyer doing to "arrange" the third party loan?
From: (Redacted)
Sent: Tuesday, June 24,2014 8:59 AM
To: Verne, B. Michael; Walsh, Kathryn E.
Cc: (Redacted)
Subject: RE: Question Regarding Leveraged Acquisition
Mike-
Thanks for your prompt response. Just to clarify --in our scenario, Buyer is arranging the loan to Target from the third party bank {but not providing the loan or guaranteeing it). Do you still agree that the loan proceeds are not included in the size of transaction?
Many thanks,
(Redacted)
From: Verne, B. Michael [mailto:MVERNE@ftc.gov]
Sent: Tuesday, June 24,2014 8:52AM
To: (Redacted); Walsh, Kathryn E.
Cc: (Redacted)
Subject: RE: Question Regarding Leveraged Acquisition
(Redacted) - We lately have said on several occasions that if the proceeds of the loan are going to the interest holders of the Target, they should be included. But all of them involved the Buyer either arranging the loan, providing the loan, taking on the loan itself or guaranteeing the loan. None of these appear to be the case in this transaction. We agree that the loan proceeds are not included in the size of transaction.
From: (Redacted)
Sent: Monday, June 23,2014 5:09PM
To: Verne B. Michael; Walsh, Kathryn E.
Cc: (Redacted)
Subject: Question Regarding Leveraged Acquisition
Hi, Mike and Kate-
(Redacted) and I are working on the leveraged acquisition of privately-held LLC interests. We would like your guidance as to whether the debt to be incurred by the target ("Target") from a third party bank in connection with the acquisition can be disregarded in determining the purchase price for HSR purposes.
Assume in the following scenario that the size-of-person test is satisfied. Target's equity holders ("Sellers") will form a new LLC ("Holdco") and exchange their interests in Target for interests in Holdco. Target then will borrow approximately $51million from a third party bank and will distribute the proceeds of the loan to Holdco, which, in turn, will distribute such proceeds to Sellers immediately prior to the transaction. The loan will be secured by Target assets and Target equity and is contingent on the purchase of Holdco LLC interests by the buyer ("Buyer"). Buyer is arranging the financing, but will not guarantee payment of the loan, nor provide funding for the loan. Target would not have incurred the loan but for the sale of Holdco LLC interests to
Buyer. Moreover, distribution of the loan proceeds to Sellers is contingent on the purchase of the Holdco LLC interests by Buyer.
Buyer then will acquire 65% of the LLC interests of Holdco for a payment of approximately $52 million to Sellers after payment of transaction expenses. (The purchase agreement provides that the purchase price will be the product of (a) 65% multiplied by (b) the value of 100% of Target interests prior to Target incurring the debt (as agreed by Buyer and Sellers) less the proceeds from the third party bank loan plus Buyer transaction expenses.) Sellers will retain the remaining 35% of the Holdco LLC interests. Consequently, Sellers will receive a total of approximately $103 million combined from the third party loan proceeds and Buyer payment.
In view of the facts that Buyer is not incurring the loan, providing the loan, or guaranteeing the loan, (Redacted) believes that the amount of the loan should not be included in the value of the transaction. This conclusion is supported by the attached informal interpretation, dated Apri14, 2012,as well as by earlier informal interpretations 0801014 (http://www.ftc.gov/enforcement/premerger-notification-program/informal interpretations/0801014) and 0404012 (http:ljwww.ftc.gov/enforcement/premerger-notification- program/informal-interpretations/0404012).
Other informal interpretations, however, including the attached LBO scenarios you worked through with (Redacted) in 2008 indicate that the loan should be included in the transaction value. See the attached informal interpretation from 2008 and informal interpretation 0909001(http://www.ftc.gov/enforcement/premerger-notificaticn-program/informal-…). We note that in each case above, however, the buyer or its subsidiary either incurred the loan, provided the loan, or guaranteed the loan.
Is the attached April 4, 2012 informal interpretation the PNO's current position on leveraged acquisitions such that the purchase price in our scenario described above is $52 million and the transaction, consequently, is not reportable under HSR?
(see Image File for Additional correspondence 2012)