1610003 Informal Interpretation

From: 	Walsh, Kathryn E.
To:
Cc: 	Gillis, Diana L.
Subject: 	RE: Question regarding analysis of "new debt" under new FTC guidance
Date: 	Monday, October 17, 2016 11:00:52 AM
Your analysis is correct, all three are $60m deals.
From:
Sent: Monday, October 17, 2016 9:58 AM
To: Walsh, Kathryn E.
Cc:
Subject: Question regarding analysis of "new debt" under new FTC guidance
Kate,
I have a follow-up question about the FTC's new guidance regarding the treatment of debt in the
valuation of LBO’s transactions, which was posted on the FTC’s website on October 6, 2016.
https://www.ftc.gov/news-events/blogs/competition-matters/2016/10/lbos-size-transaction-test#comment-
414873; specifically, whether, if the buyer refinances the transaction by arranging for a new lender to pay
off the target’s existing debt and provide additional debt, the entire amount is deemed "new" debt for HSR
purposes.
1. 	By way of hypothetical, assume Company A proposes to buy 100% of the voting securities of
Company B, which has an outstanding loan from Bank C for $40 million. Under the stock
purchase agreement, Company A will pay $60 million of cash to shareholders of Company B and
assume the outstanding $40 million target company debt. This is a $60 million non-reportable
transaction because the equity acquisition price falls below the $78.2 million size of transaction
threshold. This result would not change if the acquisition agreement was based on a pricing
formula consisting of "$100 million, minus Company B’s existing debt (whether retired or
assumed by Company A )." The “determined” acquisition price under Rule 801.10(a)(2)(i) would
still be $60 million.
2. 	Same facts as in #1 above, but assume Company A will finance the transaction by paying $40
million cash, assume the existing $40 million target company debt, and borrow from a new bank
an additional $20 million (the “new debt”) through the target company. The sellers will receive
$60 million for the voting securities. This too is not a reportable transaction because the buyer’s
assumption of the existing $40 million target company debt is excluded.
3. 	Same facts as in #2 above, but assume that Company A will finance the transaction by paying
$40 million cash and, instead of assuming the $40 million of existing debt, secure entirely new
debt on the target in the amount of $60 million to finance the transaction. Specifically, the buyer
will refinance the existing $40 million debt and (as in #2 above) incur an additional $20 million in
debt.
I believe this is also not a reportable transaction because out of the $60 million debt, only $20
million represents additional (“new”) debt incurred to finance the transaction. The other $40
million is simply refinancing the debt that exists at closing. Our question here is whether
replacing the existing debt (instead of assuming it) and layering on $20 million in “new” additional
debt at the target company converts the existing debt to “new” debt under the FTC’s new blog
interpretation so that the deal is now $100 million and thus reportable.
Under all three scenarios above, the selling shareholders will receive only $60 million before
transaction expenses and other exempt deductions. Therefore, we believe that under all three
scenarios, the transactions are not reportable.

Do you agree?
Best regards,
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