Question
B.Michael Verne
PremergerNotification Office
Room303
FederalTrade Commission
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
DearMr. Verne:
This letter is to confirm the substanceof our telephone conversation on September 7, 2007. As I described in the call, werepresent A, which proposes to purchase assets of B that constitute a grainterminal (i.e., real estate, grain elevators and other improvements, grain andfertilizer inventories, grain and other contracts, vehicles, and other assets).Following the acquisition, A will own the terminal and operate its business.
As a part of its business, B enters intocontracts with farmers to purchase, at a future date, the corn, wheat, andother grains that they produce. The purchase price that B will pay in thefuture is set at the time it enters into a contract with a farmer. Forinstance, B might agree on June 1 to acquire X bushels of corn from a farmer onOctober 1 at Y dollars per bushel.
B also enters into contracts to sell, ata later date, the grain it purchases from farmers. Again, the sale price isfixed at the time B enters into the contract to sell, which can be monthsbefore the sale is concluded and the grain delivered to the buyer.
Since grain prices constantly fluctuate, the price atwhich B agrees to purchase or sell grain most likely will not be the marketprice of the grain on the date or purchase or sale.
The asset purchase agreement between Aand B provides that the amount that A will pay B with respect to the grainpurchase and sale contracts, which A will perform after the closing, will bethe difference at the close of business on the business day immediatelypreceding the closing of the asset purchase between the market price (FOB atB's location with certain adjustments for transportation and other costs) andthe contract price. Thus if the contract price on a grain purchase contract is$8.00 per bushel and the market price, as adjusted, at the close of business onthe business day immediately preceding the closing is $8.50 per bushel, A will oweB a premium of $0.50 per bushel covered by the contract. All of the grainpurchase and sale contracts will be valued in this manner, and contracts withpositive differences will be netted against those with negative differences todetermine the aggregate premium, if any, that A must pay B.
In our call you indicated that the fair market valueof a grain purchase or sale contract would be the amount of the premium thatthe buyer pays the seller, and you confirmed that the difference between themarket price on a specific date and the contract price was a reasonable methodof measuring the premium. For the purpose of determining whether it is requiredto file a premerger notification, A plans to use the methodology described todetermine the fair market value of the grain contracts it will acquire as of adate that is within either 60 days before it is required to file a premergernotification or 60 days before the closing of the acquisition if no such filingis required. (See 801.10(c)(3) regarding timing of fair market valuedetermination.)