Question
From: (redacted)
Sent: Tuesday, June 19, 2007 4:03 PM
To: Walsh, Kathryn
Cc: (redacted)
Subject: HSR Question on Valuation - Size ofTransaction
Kate - Thanks for fielding ourrecent calls and for your guidance.
Here is a statement of the facts we discussed with you.
In broad brush, theultimate objective of the overall transaction is to distribute cash out of anexisting business to its current owners and to sell an interest in the businessto a new investor group (the "Investors").
As currently proposed, the elements of the greatertransaction and the manner in which it would unfold are as follows:
1.Thebusiness is now owned and operated by a corporation (the"Corporation").
2.TheCorporation will form a limited liability company (the "LLC"). All ofthe member interests of the LLC will be owned initially by the Corporation.
3.Afterthe formation of the LLC, the Corporation will transfer all of its assets,subject to all of its liabilities, to the LLC. In addition, the LLC will sellenough of its member interests to the existing shareholders of the Corporation(the "Shareholders") so that the Shareholders will hold 1% of the LLC'smember interests. The Corporation will hold the other 99%.
4.TheLLC will then borrow $41.3 million from a third-party (presumably a bank orother financial institution) that is not affiliated with the Shareholders, theCorporation, the LLC or the Investors (the "Lender"). The proceeds ofthe loan will be distributed by the LLC to the Corporation and the Shareholdersin proportion to their member interests in the LLC. It is expected that theCorporation and the Shareholders will not be permitted to distribute or usethose funds unless the Investors make their intended investment describedbelow. It is also expected that the loan will initially be secured by a pledgeof the distributed funds. The loan will not be guarantied by the Investors, norsecured by assets of the Investors. The Investors will take the lead inidentifying and interviewing potential lenders for the LLC, developing a termsheet and negotiating proposed terms. The LLC, however, will have soleresponsibility for approving the Lender and the loan and settling upon loanterms. (Note that instead of an interim loan followed by a replacement loan, itis now more probable the two loans will be combined into one set of loandocumentation from one lender with the loan initially having a short maturity(the interim component) which will then convert into a long maturity (thereplacement component) if the Investors, in fact, purchase the Class A Sharesas planned -- although two separate loans (an interim loan followed by areplacement loan), perhaps from two different lenders, is still a possibility.)
5.Theoperating agreement of the LLC will be restated to create three classes of"shares" with varying voting and economic rights. Initially, all ofthe Class A shares will be held by the Corporation. Those Class A shares willentitle the Corporation to greater than 50% of the profits of the LLC orgreater than 50% of the assets of the LLC upon dissolution.
6.Atthe ultimate closing, (a) the Investors will purchase all of the Class A Sharesfrom the Corporation for (i) approximately $23 million paid currently and (ii)the future obligation to pay the members of the LLC their pro rata portions ofan additional payment geared to the financial performance of the LLC over theyear following the closing (the "Earnout") and (b) thereupon therecipients of the LLC's prior $41.3 distribution (from the loan proceeds) willbe free to use those moneys.
7.TheEarnout will not exceed $21.5 million. The Investors will be obligated to payover to the Corporation the portion of the Earnout they are entitled to receiveas a consequence of holding the Class A shares.
8.Inone way or another, each element of the overall transaction will be subject toor contingent upon the others.
9.Wehave assumed for purposes of the analysis that the size-of-the-parties testwill be met.
We would be grateful if you would confirm for us yourconclusion that under the foregoing facts the $41.3 million borrowing anddistribution by the LLC would not be included in the consideration being paidfor the Investors' acquisition of the Class A Shares and that, accordingly, thesize-of-the-transaction threshold would not be met since the totalconsideration could not exceed $44.5 million (the $23 million paid at closingplus a maximum possible earnout of $21.5 million).
Kind regards,
(redacted)