Question
From: (redacted)
Sent: Wednesday, December 02, 2009 12:30 PM
To: Verne, B. Michael
Cc: (redacted)
Subject: 802.51 asset valuation questions
Mike,
As we discussed, below I summarize the assetvaluation issues we would like to discuss at 2 PM. I understand that (redacted)spoke to you about this transaction a few days back. The target is a foreignissuer valued in excess of $65.2 million. Target's business involvesspecialized cargo transposition. Although much of the transportation involvespick up and deliveries outside tile US, some portion of the customers areglobal companies headquartered in the US. In undertaking an assessment of the802.51 exemption regarding revenues in or into tile US, I understand that youadvised (redacted) a few days back that revenue from thesetransportation services is US revenue if the pickup or delivery is in the US.
We now have some questions relating to determiningthe value of US assets under 802.51. The target has some office space and otherphysical assets in tile US which will of course need to be valued. However,much of the asset value relates to assumed contracts and related customerrelations (goodwill).
Turning to the contracts, I have seen some informalopinions indicating that contracts written under US law are US assets, but in the past when I discussed this with you we concluded that if there is little US nexus to tile services provided under the contracts then they are not US assets even if governedby US law. Here, we have some contracts governed by US law where thecounterparties to the target are global companies with US headquarters (USpersons), but the transportation pickup and drop-off points are outside the US. When the services are provided outside tile US, can we assume that the assumed contractis a non-US asset? Assume instead that the pickup or drop-off point is in the US. Since, as noted above, the revenue associated with that contract is US revenue, I assume that the contract is a US asset. Do you agree? Do these answers change if thecontract counterparty is a non-US person? Does the place of contractnegotiation matter?
Most of the assumed contracts are short term, and asignificant portion of the business value relates to the customer relationships(goodwill leading to future contracts). Assuming we can place a value on totalgoodwill, is it fair to apportion it based on the proportion of US to worldwiderevenue, with US revenue determined as noted above? Alternatively, would it beappropriate to apportion it on the basis of the value of assumed US toworldwide contracts (determined as detailed in the prior paragraph) on theassumption that the goodwill is tied to the current contracts?