Question
(redacted)
May 3, 1999
Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th & Pennsylvania Avenue, NW, Room 303
Washington, D.C. 20580
Dear Mr. Verne:
The purpose of this letter is to confirm our understanding that no filing would be required in connection with the transaction set forth on the attached Transaction Description.
Please review the attached materials and confirm to me if our understanding is correct. I greatly appreciate your assistance in this matter.
The issues are the ;same as we have previously discussed on several occasions with respect to consideration or "rollups". In fact this is the same company that we discussed last August, except that there is a private placement of preferred stock rather than an IPO of common stock and the total number of businesses involved is less. For your convenience, I have attached a copy of the correspondence from last August.
Should you have any questions concerning this matter, please do not hesitate to call me collect (redacted)
Sincerely,
(redacted)
cc: (redacted)
[Attachments see PDF]
(redacted)
TRANSACTION DESCRIPTION
Corporation X was formed for the purpose of acquiring roofing contractors (SIC Code 1761). Corporation X is its own ultimate parent entity and will not have active business operations until the first acquisitions are made. Corporation X does not have annual net sales or total assets in excess of $10 million.
It is proposed that Corporation X acquire six businesses having six different ultimate parent entities. No ultimate parent entity of any of the businesses has annual net sales or total assets of $100 million or more. Some of the businesses are conducted in multiple corporations. The consideration for each acquisition will consist of cash and common and preferred stock of Corporation X.
Business A, the largest business, has annual net sales of approximately $22.2 million, has total assets of approx. $12.2 million and will be acquired for more than $15 million. Each of the other five businesses has annual net sales of less than $20 million, has total assets of less than $6.3 million and will be acquired for less than $13 million. The aggregate annual net sales of all six businesses is approximately $80.5 million and the aggregate total assets is approximately $25.3 million.
All acquisitions will occur simultaneously, along with a private placement of approximately $10 million of voting preferred stock of Corporation X with investors. The ultimate parent entity of one investor, Investor Y, has total assets in excess of $100 million. The private placement is necessary to raise the proceeds to pay the cash portion of the consideration and is a condition to closing the acquisitions.
Investor Y will acquire voting preferred stock of Corporation X for approximately $8 million, which stock will represent less than 50% of the voting securities of Corporation X, and Investor Y will not have the right to elect 50% or more of the directors of Corporation X.
Each of the acquisitions is subject to certain terms and conditions. One condition to closing of each of the acquisitions is that all six of the businesses be acquired, however, this condition can be waived.
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Corporation X believes that it would be difficult, if not impossible, to complete the private placement of the preferred stock of Corporation X on the terms specified in the acquisition agreements without the acquisition of Business A, which acquisition is a condition to the closing of each of the acquisitions. In addition, without Business A, the acquisitions will not create a large enough business entity to accomplish the operational and financial objectives of Corporation X, which would also adversely affect the private placement.
Based on the foregoing, it is likely that the transaction will not close unless Business A is acquired. However, because of market conditions, there is no assurance that the transaction will close even if Business A is acquired.
It is our understanding that the FTC treats the acquisitions and the private placement of preferred stock not as a single transaction, but rather as a sequence of transactions with each of the ultimate parent entities. It is also our understanding that the FTC will permit the acquiring entity to determine the sequence of the acquisitions and the private placement if (a) there is a valid business purpose for the sequence other than the avoidance of filing under the Act or (b) there is a filling under the Act that provides notification of these transactions.
Corporation X proposes to sequence Business A as the first acquisition, with each of the other five businesses to be acquired in order of revenues. Corporation X then proposes to sequence the sale of the preferred stock after the acquisition of the businesses.
QUESTION
Will the acquisition of Business A by Corporation X, and the acquisition of preferred stock of Corporation X by Investor Y, be exempt from the filing requirements of the Act?
OUR UNDERSTANDING
Corporation X has a valid business purpose for making the acquisition of Business A first, in that the transactions will likely not be consummated without the largest business being acquired. Alternatively, if one of the smaller businesses were not acquired, the transaction could still likely close. Corporation X has a valid business purpose for making the private placement last, in
(redacted)
that Investor Y will not purchase the preferred stock unless the acquisitions of the businesses have occurred.
It is our understanding that the acquisition of Business A would be exempt because, at the time of the acquisition, there is no $100 million person for purposes of Section 7A(a)2 of the Act. It is also our understanding that the acquisition of each of the five other businesses would be exempt under the minimum dollar value exemption of 16 C.F.R. 802.20 in that each of those businesses has annual net sales and total assets of less than $25 million. [STAFF NOTE: and considerationf for v/s is $15 MM or less]
It is our understanding that the acquisition of the preferred stock by Investor Y would be exempt under the minimum dollar exemption of 16 C.F.R. 802.20 in that Investor Y will pay less than $15 million for the preferred stock and will not hold 50% or more of the voting securities of Corporation X. [STAFF NOTE: Agree]