Question
Hy David Rubenstein
Premerger Notification Office
Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Identification No (redacted) Acquisition of (redacted)
Dear Mr. Rubenstein:
Reference is hereby made to the Hart-Scott-Rodino Pre-Merger Notification Form (with documentary attachments thereto (the H-S-R Notice”) relating to the above-referenced proposed acquisitions (the “Proposed Acquisitions”) filed with your office on August 16, 1991, by (redacted) , the ultimate parent of (redacted) . As described in the H-S-R Notice, (redacted) (the “Seller”) has entered into (i) and Agreement and Plan of Merger dated (redacted) (the “Merger Agreement”) with the Buyer, whose ultimate parent is (redacted) pursuant to which (redacted) will merge with (redacted) a wholly-owned subsidiary of the Buyer, becoming a wholly owned subsidiary of the Buyer and (ii) a Purchase Agreement dated (redacted) (the “Purchase Agreement”) with the Buyer pursuant to which the Seller will sell to the Buyer 100% of the capital stock of (redacted) The purchase price for the sale of (redacted) to the Buyer is (redacted) The purchase price for the sale of (redacted to the Buyer is (redacted) The Buyer has the option under each of the Merger
Agreement and Purchase Agreement to pay the purchase price to the Seller in either cash or Class A Common Stock of the Buyer. The Seller will not accept Class A Common Stock of the Buyer to the extent that the amount of such stock delivered, when combined with shares of Class A Common Stock beneficially owned by the beneficial owners of the Sellers within the meaning of Section 16 with the Security Exchange Act of 1934 has amended, will equal or exceed 10% of the issued and outstanding Class A Common Stock of the Buyer. In the event that the Buyer elects to pay the purchase price in Class A Common Stock of the Buyer, it is the Seller’s intention to sell most of the securities so acquired shortly after the acquisition and distribute the remaining shares to various investors in the Seller.
Prior to submitting the H-S-R Notice, this office had communications with the Federal Trade Commission describing the transaction. At that time, the Federal Trade Commission [note 1] initially indicated that the acquisition of stock by the Seller wold be exempt from the filing requirements under the Act due to the fact that such acquisition was solely for investment purposes. Subsequent to filing the H-S-R Notice with the Federal Trade Commission, the Federal Trade Commission [note 2] indicated that the acquisition of stock of the Buyer by the Seller would not be considered “solely for investment purposes” because the Buyer and (redacted) are allegedly competitors.
This letter, submitted at the request of the Federal Trade Commission, demonstrates that (i) (redacted) and the Buyer are not competitors and (ii) the Seller’s receipt of stock in the buyer fits squarely within the “solely for investment purposes” except Section 7A(c)(9) of the Act.
A. (redacted) and the Buyer are not competitors
Based upon discussions with (redacted) sole involvement in the commercial consumer cellular telephone industry is through the Seller. Although the Seller and the Buyer are in the same product market, they do not compete in the same geographic market. The geographic markets of cellular telephone companies were determined by the Federal Communications Commission (the “FCC”) pursuant to regulation, utilizing Metropolitan Statistical Areas (“MSA”s”) and Rural Statistical Areas (“RSA’s”). See 47 CFR § 22.903 (a copy of which is attached hereto as Exhibit A). For a cellular telephone company to operate in any given cellular market, the FCC’s prior authorization is required.
In any cellular market, the FCC authorizes only two competing systems, one operating on the B frequency block and the other operating on the A frequency block. 47 CFR § 22.902(b) (a copy of which is attached hereto as Exhibit A. The license on the b frequency block is initially granted to the local wireline telephone company operating in that cellular market and the license on the B frequency block is initially granted to a non-wireline operator.
Within its assigned (redacted) and (redacted) the authorized cellular telephone company identifies in its initial license application to the FCC its Cellular Geographic Service Area (“CGSA”), the size of which may not exceed the applicable MSA or RSA boundary. 1 The CGSA is the market in which the license holder for that (redacted) or (redacted) sells its product - cellular telephone service. Outside of its CGSA, cellular telephone service would be provided by a carrier licensed to operate in the next adjacent CGSA (assuming a licensed operator existed therein. 2 The two licensed cellular operators compete within their MSA or RSA by expanding geographic coverage (their CGSA), devising service plans, adding special features and cutting telephone prices. Each cellular geographic market is discreet with only two competitors to each market and a competitor gains access to that market solely by obtaining FCC authorization to provide service on one of the two frequency blocks in that cellular market.
Following the consummation of the proposed acquisitions, (redacted) will operate only in the following MSAs or RSAs and compete only with the following persons:
Competitors of the Seller in Each Cellular Market 3
MSA or RSA Block A Competitor
(redacted) (redacted)
The FCC’s definition of geographic cellular markets fully comports with case law. The United States Supreme Court reviewed an analogous, but less compelling set of facts, in United States v. Philadelphia National Bank. In Philadelphia national Bank, the Court held that, even though two banks proposing to merge did business outside of the four-county Philadelphia metropolitan area, because state law authorized such banks to branch only in such four-county area and because convenience of location is essential to competitive effectiveness in banking, the geographic market of the merging banks was limited to the four-county Philadelphia metropolitan area. Id., 3734 U.S. 321, 361 (1963). See also Town of Concord, Mass. v. Boston Edison Co., 721 F. Supp 1456, 1459-60 (D. Mass 1989); United States v. Waste Management, Inc., 743 F.2d 976, 980 (2d Cir. 1984) (Dallas and fort worth areas constitute separate waste collection markets despite their close proximity (45 to 50 minute drive) due to existing competitors exclusivity to either city).
Unlike a bank, which can take deposits and originate loans beyond its immediate service area, a cellular telephone company is unable to provide services beyond its CGSA. C.f. Metro Mobile CTS, Inc. v. New Vector Communications, Inc., 661 F. Supp. 1504 (D. Ariz. 1987) (court relied on the FCC geographic market definition in its decision). Due to the need for FCC authorization to operate in any cellular market, the Seller and the Buyer can only effectively provide services to persons within their respective MSAs or RSAs. clearly, under the holdings of Town of Concord, Waste Management and Philadelphia National Bank, the geographic market of a cellular telephone company is the MSA or RSA in which it is licensed to operate. Therefore, the Seller and the Buyer, operating in different MSAs and RSAs, are not competitors.
B. The facts and circumstances regarding the Seller’s acquisition of stock in the Buyer clearly indicates the Seller’s investment intent.
So long as a person acquiring stock in another does not intend to participate in the formulation of basic business decisions of an issuer, the acquisition of such stock is solely for investment purposes and therefore exempt from the filing requirements under the Act. 43 Fed. Reg. 33465 (a copy of which is attached hereto as Exhibit B). All extrinsic evidence in the present acquisition indicates the investment intent of the Seller’s acquisition of the stock.
1. The decision as to the form of payment - stock or cash - rests with the Buyer, not the Seller.
2. The amount of stock to be received by the Seller constitutes a small portion of the outstanding stock of the Buyer, clearly an amount insufficient to influence management where the ultimate parent of the Buyer, (redacted) is an individual.
3. It is the intention of the Seller to sell mot of the stock shortly acquired as part of the purchase price after consummation of the acquisitions contemplated by the Purchase Agreement and the Merger Agreement, and to distribute the rest among its investors, an intent that is wholly in line with the “sole for investment purposes” exemption.
4. As is demonstrated above, neither the Seller nor (redacted) competes with the Buyer.
5. The Agreements not to Compete to be entered into between the Seller’s subsidiaries and the Buyer cover only the (redacted) and (redacted) areas.
As demonstrated above, any acquisition of stock of the Buyer by the Seller is merely a form of payment of the purchase price for the Proposed Acquisition and made solely for investment purposes. for the reasons stated above, (redacted) should not be required to file a pre-merger notification in connection with its acquisition of stock in the Seller.
Since this transaction is on a short timetable, I respectfully request expedited review of this letter. If you have any questions, please don’t hesitate to call me.
Very truly yours,
(redacted)
cc: (redacted)
(exhibits A and B)
A de minimis overlap of cellular markets is permissible under FCC regulations due to theinherent nature and contours of the radio signal 47 CFR § 22.903(a). This overall, however, isirrelevant to the determination of the geographic market because it is insignificant and because itis not essential to competitive effectiveness. See United States v. Philadelphia National Bank, 374U.S. 321 (1963).
Although many CGSAs are coterminous with the MSA or RSA boundaries, the FCC’sregulations contemplate that cellular licensees may have CGSAs that comprise only a portion ofan RSA or MSA. For example, in an MSA or RSA, there may be several B Block licensees, eachwith a different non overlapping CGSA. This has occurred in some RSAs where the RSA hadmore than one wireline operator, all seeking to provide cellular services in that RSA. Competitionwithin any cellular market, however, is still between only two cellular companies due to the factthe licensees authorized on the same frequency block operate in different CGSAs or cellularmarkets. Thus, a cellular consumer only has two companies from which to choose - a Block B licensee and a Block A licensee.
Based upon review of The Status of MSA Cellular Markets and The Status of RSACellular Markets, each prepared by FCC, as of May 15, 1991 and July 11, 1991, respectively.