Cendant agree to buy reservation firm Galileo

Cendant agree to buy reservation firm Galileo

June 18, 2001 9:45am

NEW YORK (AP) _ Hotel and rental car giant Cendant Corp. is buying Galileo International Inc., the second-largest travel reservation firm, for dlrs 2.9 billion in cash and stock.

Under the deal announced Monday, Cendant would control Galileo's travel reservation system, which handles 92 billion transactions a year, and solidify its position as a leader in the travel reservation industry.

Both companies' boards approved the sale Sunday, with Cendant paying cash and stock worth dlrs 33 a share for each Galileo share. The price is a 10.7 percent premium over Galileo's closing price of dlrs 29.80 a share on Friday.

Cendant will also assume dlrs 600 million in debt in the deal, which is expected to close in the fall after approval by Galileo's shareholders and regulators.

United Airlines parent UAL Corp., the biggest shareholder in Galileo with an 18 percent stake, has agreed to support the deal.

Rosemont, Ill.-based Galileo has about 3,300 workers, and reported sales of dlrs 1.64 billion in 2000. It is second to Sabre in the travel reservations field.

New York-based Cendant owns tjg AmeriHost Inn, Days Inn, Howard Johnson, Ramada and Super 8 brands and has 6,000 hotel locations. Cendant also owns about 4,400 Avis car rental locations worldwide. The company has about 60,000 employees and had sales of dlrs 3.93 billion in 2000.

Cendant also owns WizCom, which helps travel companies contact travel-reservation services

Cendant closed at dlrs 18.45 Friday. If the company's shares fall below dlrs 17 or above dlrs 20, the deal will be adjusted to the current value.

Source: http://hoovnews.hoovers.com/fp.asp?layout=displaynews&doc_id=NR20010618140.5_38ec00033737a2ec

 

Cendant mulls group split
By Andrew Edgecliffe-Johnson in New York
Published: June 18 2001 13:21GMT | Last Updated: June 19 2001 01:13GMT

Cendant, the US franchising group, said on Monday it was considering splitting the company into separate travel and real estate arms, as it announced a $2.9bn agreed bid for Galileo, the airline reservations company.

Henry Silverman, chairman and chief executive of Cendant, said dividing the company was "not on the front of the stove" but was an option if Cendant could expand through further deals.

A sharp improvement in Cendant's share price this year allowed it to pay for most of the Galileo deal in stock.

The offer values Galileo at $33 per share, of which $26.57 will be paid in stock, subject to a collar of $17-$20 per Cendant share. Mr Silverman said Cendant expected to "materially" exceed analysts' earnings forecasts for 2002.

Cendant will take on about $600m in debt. The acquisition will expand Cendant's travel business, which includes Avis car rentals and the Ramada hotel franchise, giving it access to Galileo's 43,000 travel agency customers. The purchase would add 10-14 cents per share to Cendant's earnings in 2002, Mr Silverman said, and $350m-$400m to its cashflow in the same year.

The companies expect synergy benefits of $70m-$80m in the first year, partly from switching Cendant's membership travel business to Galileo's service.

 

Cendant's “Reverse Triangular” Merger With Galileo

By Robert Willens, Lehman Brothers    CFO.com    Jun 19, 2001

Lehman Brothers tax expert Robert Willens explains why the reverse merger structure influences the cash/stock mix

Cendant Corp.’s acquisition of Galileo International will be structured as a “reverse triangular” merger.

A wholly-owned, newly-created, subsidiary of CD will merge into GLC (Galileo) and the latter will be the surviving entity and become a wholly-subsidiary of CD.

This is the principal advantage of using this structure: It preserves the target’s corporate entity and, in the process, obviates the need to secure assignments of contracts, and other items, which, if they were transferred out of “corporate solution,” might entail a re-negotiation of their terms and conditions. This is the same format used by DT in connection with its acquisition of VoiceStream.

For a reverse merger to qualify as a tax-free reorganization, two special requirements (in addition to the “normal” reorganization requirements such as continuity of interest, continuity of business enterprise and business purpose) must be met:

First, the surviving entity (Galileo) must hold “substantially all” of its properties as well as a similar quantum of the properties of the merging subsidiary (other than the parent stock it “delivers” to the target’s shareholders and certain cash contributed to it by the parent). The “holds” requirement does not impose requirements that would not have applied had the corporation transferred its assets to another corporation in an attempted ‘C’ reorganization.

Thus, in recently-issued Rev. Rul. 2001-25, the I.R.S. said the holds requirement was satisfied even though the surviving corporation, as part of the plan, sold 50 percent of its “historic” business assets to an unrelated third party and retained the proceeds of sale. This conclusion was reached because in Rev. Rul. 88-48 the I.R.S. said that such a disposal of assets (and retention of proceeds of sale) would not adversely affect the target’s claim to ‘C’ reorganization treatment and, as Rev. Rul. 2001-25 makes clear, the substantially all test is applied, in the case of a reverse merger, in the same manner it’s applied in the ‘C’ reorganization arena.

The second requirement states that, in the transaction*, the former shareholders of the surviving entity must exchange, for voting stock of the issuing corporation, an amount of stock in such survivor that constitutes “control” thereof.

Since control means, for this purpose, stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and 80 percent of the total number of shares of each class (if any) of the non-voting stock, it is clear that at least 80 percent of the value of the aggregate conveyed by the issuing corporation must consist of its voting stock.

Moreover, this measurement is made not when the managements agree to the terms of the business combination, or at some intermediate point in the process, but, instead, when the transaction is consummated. This is why the possibility exists that the cash component may have to be reduced—in the event CD stock trades below the lower band of the collar. In that case, the cash element of the transaction would have to be reduced to insure that the value of the stock element—on the relevant date; the date of closing—comprises, at that time (and at that time only), the requisite percentage of the aggregate consideration conveyed.

If the “80 percent requirement” is adhered to, the transaction will constitute a “good” reverse merger such that the GLC (Galileo) shareholders who exchange their stock for CD stock will be able to do so on a tax-free basis.

* In recently-issued Rev. Rul. 2001-26, the I.R.S. indicated that stock acquired in a preliminary tender offer would count towards the determination of whether the requisite amount of survivor stock was acquired in the transaction. Stock acquired in both the tender offer and ensuing merger will count as acquired in the transaction if, under general principles of tax law, including the “step-transaction” doctrine, the steps are properly viewed as an “integrated” acquisition; that is, due to the avowed intentions of the parties, the steps are really component parts of a single course of action directed at a specific and well articulated result.

 

 

 

 

 

 

 

 

 

Internal Revenue Code §§ 368(a)(1)(A) and 368(a)(2)(E)

In a reverse triangular merger, a subsidiary ("Sub") of the acquiring corporation ("Acquiring") merges into the target corporation ("Target"). Acquiring's Sub stock is converted into Target stock and the former Target shareholders receive the merger consideration in exchange for their Target stock. This form of acquisition is often desirable for regulatory or contractual reasons when it is important that no transfer of Target assets take place.

Target shareholders can receive Acquiring stock as long as:

• Acquiring is in control of Sub immediately prior to the merger.
• After the merger Target holds substantially all of its properties and substantially all of the properties of Sub (other than stock of Acquiring distributed in the merger).
• In the merger, the former Target shareholders exchange Target stock constituting control of Target for voting stock of Acquiring.

Target can transfer all or a part of its assets to a subsidiary controlled by Target and Acquiring can transfer its Target stock to a subsidiary controlled by Acquiring.

"Substantially all the assets" of a target corporation (often referred to as the "substantially all test") is not defined in the Internal Revenue Code reorganization provisions. Rather, the concept has evolved through judicial decisions and IRS rulings and practice.

For advance ruling purposes, the IRS defines substantially all the assets of Target as assets having a fair market value of:

At least 90% of the fair market value of all of Target's assets less liabilities

and

At least 70% of the fair market value of all of Target's assets without regard to liabilities.

Case law suggests that smaller percentages of the target corporation's total assets can constitute substantially all of its assets. The courts tend to give greater weight to operating, as opposed to passive investment, assets in evaluating compliance with the substantially all test.

 

Internal Revenue Code § 368(c)

There are many different definitions of "control" in various parts of the Internal Revenue Code. For purposes of the reorganization and liquidation provisions, however, control of a corporation is defined as the ownership of:

 

Stock possessing at least 80% of the combined voting power of all classes of stock entitled to vote

and

At least 80% of the total number of shares of all other classes of stock. This language has been interpreted to require ownership of at least 80% of the number of shares of each class of nonvoting stock.

Voting power is defined as the power to elect directors. The holder of 40% of the stock of a class entitled to elect six out of ten directors possesses 24% (0.4 x 6/10) of the voting power.

Source: http://www.pmstax.com/acqbasic/ “Introduction to Taxation of Corporate Acquisitions”