Private Equity Deals at Risk After FTC Prior Approval Rule Shift

Nov. 19, 2021, 11:00 AM

Private equity firms stand to be particularly exposed to a new FTC requirement that companies get agency approval before flipping certain assets.

The Federal Trade Commission’s rule change requires companies to get agency approval for at least 10 years before they can resell assets bought from merging companies that sold them as the agency’s condition for merger approval. The requirement would apply regardless of the divested asset’s size.

The “prior approval” rule update is the FTC’s latest step, under the Biden administration, to increase its review of small and midsize mergers and acquisitions that largely had fallen off the agency’s oversight in recent years.

The update would apply to all types of buyers of subsidiaries and business units that are sold by merging companies in FTC settlements. But the 10-year standard could unnerve private equity firms, which frequently buy divested assets and flip them within several years.

“This is significant and could have collateral consequences on the M&A deal space, particularly for private equity firms and their exit plans for a carve-out business or assets,” said Erica Weisgerber, partner at Debevoise & Plimpton LLP.

The FTC challenged 28 mergers in fiscal year 2020, with 10 of those challenges resulting in settlements ordering divestitures.

Flipping Assets

Under the Hart-Scott-Rodino Act, companies that buy other companies for more than $92 million need to subject the deal to DOJ or FTC review for whether it would harm competition. The agencies can issue an approval with a condition that certain assets be sold to relieve its competition concerns.

Private equity firms often are eager buyers of divested assets from merging companies. They typically invest in companies for about four to seven years, said Jason Mulvihill, chief operating officer at the American Investment Council.

“Ten years is an eternity for investors,” he said. “It’s a very long time during which governments can turn over, markets can change—so there is a lot to consider.”

Reselling the divested assets will be subject to the FTC’s regulatory pre-approval even if the proposed buyers have never been a competitive concern.

“It puts parties in a very awkward position with respect to future deals,” said Bernard Nigro, chair of the global antitrust and competition department at Fried Frank and a former principal deputy assistant attorney general at the Justice Department’s antitrust division. “Some buyers may decide that they’re not willing to take on the risk associated with prior approval requirement.”

The FTC has always had the power—though didn’t always exercise it—to attach prior approval requirements to its merger settlements to ensure that divested assets aren’t immediately sold back to one of the merging parties. But the new policy standardizes the minimum-of-10-years requirement.

The prior approval rule also could make it harder to find buyers for divested assets, especially private equity buyers, said Jennifer Rie, a senior litigation analyst at Bloomberg Intelligence.
The rule may result in a longer vetting process or buyer rejection, she said.

Private equity firms’ influence in the market for divested companies has been an FTC concern in the past.

The FTC approved Linde AG’s $83 billion merger with Praxair in 2019, on the condition that certain assets be divested to a private equity-backed firm.

Former FTC commissioner Rohit Chopra said at the time that he would have liked the agency to require prior approval on future sales of those assets.

“I would have preferred to include additional protections for the public to safeguard against risks often posed by the private equity buyer interest in the divested assets,” said Chopra, who now heads the Consumer Financial Protection Bureau.

Different Analysis

Under the HSR merger review process, the FTC has to notify companies within 30 days as to whether their deals warrant further investigation.

But the FTC faces no such a deadline to respond to companies seeking prior approval to sell assets they bought in a previous divestiture.

“There’s no HSR-type clock on it,” said Andrew Finch, antitrust partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP and former principal deputy assistant attorney general at the DOJ’s antitrust division.

That uncertainty might not be an issue for private equity firms that hold investments long-term. But the 10-year minimum changes the analysis that sellers and buyers must undertake regarding divested assets.

For example, merging parties, anticipating FTC concerns, may decide to divest assets even before the FTC requires it as part of a merger approval settlement.

Such a preemptive sale may preserve the value of those assets—untainted by the prospect of prior approval requirements, Finch said. These moves could make the FTC’s negotiations for settlement agreements less administratively burdensome, he said.

Merging companies with potentially troublesome assets also may have to consider certain trade-offs, Finch said.

On one hand, they face costs and risks associated with selling the asset in advance to ease their path to FTC approval. But they also may have to deal with the uncertainty of having to sell assets in an environment where potential buyers are wary about having to comply with prior approval needed for subsequent resale, he said.

“Now why is that third party being penalized with all this uncertainty?” Finch said. “What is the FTC’s legal standard, what’s the timeline, how quickly are they going to approve?”

To contact the reporter on this story: Siri Bulusu in Washington at sbulusu@bloombergindustry.com

To contact the editor responsible for this story: Roger Yu at ryu@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com

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