Question
B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
7th & Pennsylvania Avenue, NW
Washington, DC 20580
Re:HSR Exemption forWarehouses and Incidental Assets
Dear Mike:
In follow-up to our conversationon November 27, 2007, I am writing to confirm my understanding that the proposedacquisition described below is not reportable under the Hart-Scott-Rodino Antitrust ImprovementsAct of 1976, as amended ("HSR Act").
Proposed Transaction
Pursuant to a proposedtransaction, Acquiring Person intends to purchase from Sellers variouscompanies that are commonly controlled. The businesses to be acquired, theTarget Businesses,collectively provide services including: stevedoring, temperature controlledand ambient warehousing, overlandtransportation, and import/export and FDA inspections. The businesses offer integrated logistics solutions so that clients donot need to negotiate and manage separate agreements for services such as stevedoring, warehousing andtransportation services. However, clients can and do purchase from the Target Businesses services such as warehousingwithout the purchase of other services.
The value of the overalltransaction exceeds $100 million. The Acquiring Person has conducted a fair market valuationwith respect to the portion of the transaction that is exempt under the HSR Act's Warehouse Exemption, 16 C.F.R. 802.2(h),and with respect to the portion of the transaction that is potentially reportable. Specifically,the Acquiring Person, for purposes of its fair market valuation, has categorized each business unit within the TargetBusinesses as either exempt ornon-exempt. Under the fair market valuation, the non-exempt business units,those that would notconsist solely of warehouses and assets incidental to the ownership ofwarehouses, will not in aggregate exceed $59.8 million, the HSRsize-of-transaction threshold.
The Acquiring Person conducted its fair market valuation in the followingmanner. First, the Acquiring Person treated the fairmarket value of all of the Target Businesses taken together as equal to the purchase price given thatthis is an arm's length transaction and the Target Businesses are transferring at this price. Next,each business unit was valued based on a net present value, NPV, of cash flow expectedto be generated by that business unit over a many year period. The NPV of eachbusiness unit was then divided by total NPV of all the business units todetermine the percentage of the total value that each business unit comprised.The percentages were then summed for the non-warehouse components to determinethe percentage of total value comprised by the non-exempt business units. Thepercentage of total value comprised by the non-exempt business units was thenmultiplied by the purchase price to determine the fair market value of thenon-exempt components.
Acquiring Person performed itsvaluation on a business unit-by-business unit basis rather than on anasset-by-asset basis because it values the businesses based on the cash flows expectedto be generated by them, not based on the value of individual assets. HadAcquiring Person performed the valuation on an asset-by-asset basis, it verywell may have reached different warehouse versus non-warehouse values (althoughnot necessarily a different conclusion as to reportability under the HSR Act).
The business units that AcquiringPerson is treating as exempt offer various services associated with thewarehouse in those business units including: freight handling (to load andunload trucks bringing freight to and from the warehouses), storage, blastfreezing, freight consolidation, packaging, customs related services, FDAinspection services and USDA import/export inspection services.1
Conclusions
You confirmed the following:
The transactiondescribed above is exempt under the HSR Act.
The fair marketvaluation methodology described above is an acceptable way to conduct thevaluation for HSR Act purposes.
The acquisition ofwarehouses described above is exempt from the HSR Act pursuant to 802.2(h),notwithstanding the exception in that exemption (to the effect that a warehouseacquisition is not exempt "when the ...warehouse is to be acquired in anacquisition of a business conducted on the real property"). The exceptionto the exemption does not apply where, as here, the business conducted on thereal property is itself the operation of a warehouse and services incidental towarehousing. The various services offered by the warehouses storage, blastfreezing, freight consolidation, packaging, customs related services and FDA inspectionservices are considered incidental to the warehouse business and do notchange the exemption available for warehouses and incidental assets. We alsobelieve that freight handling (to load and unload trucks bringing freight toand from the warehouses) and USDA import/export inspection services offered bythe warehouse businesses likewise are incidental to the warehouse business anddo not change the exemption available for warehouses and incidental assets.Please let us know if you disagree.
Exempt assetsincidental to the ownership of warehouses include: lift trucks, fork lifts,refrigeration equipment, racks, assets for food preparation/packing servicesand customs related services. We also understand that exempt assets incidentalto the ownership of the warehouses include other assets used to offer thevarious services described in the prior bullet point above.
Pursuant to 16 C.F.R. 802.4, the Warehouse Exemption remainsapplicable whether the transaction is structured as the acquisition of non-corporate interests(e.g., limited liability company interests or limited liability partnership interests) or theacquisition of voting securities.
Please let me know as soon as possibleif you disagree with any of the conclusions discussed above, or if I havemisunderstood any aspect of your advice. Thank you for your assistance in this matter.
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1 We did not mention freight handling(to load and unload trucks bringing freight to and from the warehouses) andUSDA import/export inspection services during our call but believe that theoffering of these services by the warehouse businesses does not impact the HSRexemption.