Hess ‘watching the market’ after Noble IPO, considers listing its own MLP, COO says

Provided exclusively by Mergermarket

Hess (NYSE: HES) sees the performance of Noble Midstream‘s (NYSE: NBLX) initial public offering as a positive sign for its own IPO of a master limited partnership, Hess COO Greg Hill said.

It’s “absolutely” a positive sign, Hill said, speaking on the sidelines of the Deloitte Oil & Gas Conference in Houston on 21 September.

New York-based Hess refiled for an IPO of its midstream operations in the Bakken in December. Earlier that year, it sold a 50% stake in Hess Midstream to GIP for USD 2bn. It had originally filed for an IPO in September 2014, with a USD 250m placeholder, but that deal never launched.

The company is “watching the market” and will make a determination at an uspecified time in the future on when to take the business public, Hill told this news service.

A first industry investor “wouldn’t be surprised” to see Hess launch its IPO soon but had not heard of any imminent plans.

Noble Midstream raised USD 323m from an IPO earlier this month. The sale closed early and priced at an above the marketed range of 22.50 a unit, giving it an implied yield of 6.7%. The units have risen almost 19% since the offering.

Three industry investors described Noble Midstream and Hess Midstream as being very similar offerings as both are gathering and processing midstream companies in predominantly crude oil plays backed by an upstream sponsor.

Both were also described as being only moderately interesting to investors because they did not bring anything new to the market. Investors have “done a 180” on Noble Midstream, however, and the deal saw strong interest, said a second industry investor.

Noble was marketed similarly to Antero Midstream (NYSE: AM), where increasing production volumes would drive high distributions with drop-down acquisitions providing added “juice,” said the first industry investor. Antero Midstream is a natural gas focused midstream company sponsored by Antero Resources (NYSE: AR) that owns infrastructure in the Marcellus.

by Mark Druskoff in Houston

As seen in the mergermarket newsletter on 23/09/2016

IRC Section 385 Proposed Regulations: Broad Implications But Perhaps Not For Portfolio Companies

On April 4, 2016, Treasury and the Internal Revenue Service released proposed regulations under Section 385 that would treat as stock certain related-party interests that otherwise would be treated as debt for federal income tax purposes.  The proposed regulations extend far beyond inversion transactions and apply to instruments issued by one corporation in an expanded affiliated group to another corporation in an expanded affiliated group.  If finalized in their current form, these proposed regulations could affect routine financing transactions, including investments by foreign corporations in related U.S. corporations.  However, the proposed regulations exempt transactions within a U.S. consolidated group.  They also generally would not apply to a loan to a U.S. corporation from a foreign partnership that is not otherwise 80% owned by members of the same expanded affiliated group as the U.S. corporation.
The proposed regulations also contain extensive documentation requirements, which apply (i) if stock of any member of the expanded group is traded on (or subject to the rules of) an established financial market, (ii) on the date the instrument is issued or otherwise becomes an expanded group instrument, total assets exceed $100 million, or (iii) on the date the instrument is issued or otherwise becomes an expanded group instrument, annual revenue exceeds $50 million.  It is not clear if the total asset or annual revenue tests apply to the expanded affiliated group as a whole or to the corporation making or receiving the purported loan.  Failure to comply with these documentation requirements will result in any interest being treated as per se debt.
The proposed regulations will undoubtedly be subject to extensive comments.
The proposed regulations provide that the final regulations will be effective as of the date of issuance of the proposed regulations.

Any private equity fund, independent sponsor or other investor that has questions about tax regulations and new tax developments pertinent to your business should contact Jerry Chen (212) 294-8212, Mark Christy (312) 558-9502, Eva Davis (213) 615-1719), Rachel Ingwer (212) 294-4760, Roger Lucas (312) 558-5225, Soyun Park (212) 294-5327, Nick Pesavento (312) 558-8771, Justin Trapp (312) 558-6374, or any member of your Winston deal team.


New Partnership Audit Rules

On November 2, 2015, President Barack Obama signed into law the Bipartisan Budget Act of 2015 (the “Act”), which significantly modified how the IRS audits entities treated as partnerships for U.S. federal income tax purposes, including private equity funds, hedge funds, real estate, and other private investment vehicles.
The new partnership audit rules are effective for taxable years beginning after December 31, 2017, although partnerships may elect into the new rules earlier than the effective date.  The new rules are intended to make it administratively less burdensome for the IRS to conduct partnership audits and collect resulting taxes, penalties, and interest attributable to any audit adjustments.  It should be expected that the rate at which the IRS conducts audits of all partnerships, including private equity funds, will increase significantly under the new audit rules.
Current Partnership Audit Rules
Most partnerships are currently subject to audit rules adopted as part of the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).  Under these rules, the IRS conducts a single examination at the partnership level.  If the IRS makes an audit adjustment, the partners during the tax year to which the adjustment relates are responsible for paying any tax due.  Under the current audit rules, the IRS must flow the adjustment through to the ultimate partners.  This can be complicated for partnerships with many partners and for partnerships in tiered structures where the IRS has to flow adjustments up through several levels before reaching the ultimate partners.
New Partnership Audit Rules
The new partnership audit rules will apply to all entities (including a flow-through limited liability company) treated as partnerships for U.S. federal income tax purposes, except for partnerships with 100 or fewer partners meeting certain requirements that affirmatively elect to opt out of the new audit rules.  However, this “opt-out” election is expected to be unavailable for certain partnerships, including many private equity funds, because, in the absence of additional Treasury guidance, the “opt-out” election is not available for any partnership that has, as one of its partners, another partnership.
The new audit rules are intended to allow the IRS to more easily audit and assess taxes against large partnerships.  To further this purpose, under the new partnership audit regime, the default rule provides that, if the IRS makes an adjustment at the partnership level, the IRS will assess and collect tax, penalties, and interest attributable to such audit adjustment at the partnership level.  This is a significant departure from the existing TEFRA audit procedures, under which tax is assessed and collected from the partners who were partners of the partnership in the year to which the adjustment relates.
Note that, under the default rule, because the partnership is directly liable for its partners’ tax liabilities (including penalties and interest, if applicable) resulting from an audit adjustment, the persons who are partners during the tax year in which the audit is finalized will bear the economic burden of the tax liabilities of any former partners from the tax year to which the adjustment relates.
To avoid liability at the partnership level under the Act, a partnership can elect an alternative procedure where the partnership will issue adjusted IRS Schedules K-1 to each partner who was a partner during the tax year to which the adjustment relates.  This alternative procedure under the Act is similar to the existing TEFRA audit procedures in that the partnership-level audit adjustments flow through to the partners who were partners during the tax year to which the adjustment relates.  However, under the alternative procedures, the resulting tax underpayment is subject to a two percent higher rate of underpayment interest, which underpayment interest does not appear to be tax-deductible.
Impact on Private Equity Funds
Although it will be several years before the IRS begins to conduct audits under the new partnership audit rules, existing partnership agreements, offering memorandums, subscription agreements, and side letters should be reviewed to determine whether any necessary or appropriate changes should be made to address the new audit rules.  Specifically:

  • Partnerships should decide whether they will elect to have the alternative procedure apply, and partnerships that meet the requirements for the “opt-out” election should decide whether such an election should be made.
  • Offering memorandums should be updated to disclose the new partnership audit rules and resulting consequences, including that the partnership and its current partners may be liable for taxes that relate to prior years.
  • Partnership operating agreements should be amended to designate a “partnership representative” that will act on behalf of the partnership for purposes of the new audit rules.
  • Any partnership that has partners whose interests have changed over time, including private equity funds, venture capital funds, or other investment vehicles, should consider including in its partnership agreement general indemnity obligations whereby each partner and former partner agrees to indemnify the partnership for its appropriate share of any tax liabilities imposed on the partnership as a result of the default rule.
The new audit rules leave many issues unanswered.  The IRS intends to issue significant guidance before the new partnership audit rules become effective.

Any private equity fund, independent sponsor or other investor that has questions about tax regulations and new tax developments pertinent to your business should contact Jerry Chen (212) 294-8212, Mark Christy (312) 558-9502, Eva Davis (213) 615-1719), Rachel Ingwer (212) 294-4760, Roger Lucas (312) 558-5225, Soyun Park (212) 294-5327, Nick Pesavento (312) 558-8771, Justin Trapp (312) 558-6374, or any member of your Winston deal team.


More Reasons to Get Excited About Barcelona

The EuroGrowth 2016 Venue Is a Hot Spot for Culture, Food and Architecture: Conde Naste Traveler Reports

Barcelona, host city to ACG’s EuroGrowth 2016 conference, has much to offer ACG members in their off hours. Art Noveau architecture, Medieval alleyways, a plethora of museums and Mediterranean food are among the many draws to this historic city, according to a series of spreads covering Barcelona in Conde Naste Traveler.

Register here for EuroGrowth 2016, Oct. 20-21.

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Two Private Equity Funds Saddled With Pension Liability of Bankrupt Portfolio Company

On March 28, 2016, a Massachusetts District Court ruled that two affiliated private equity funds (Sun Capital Partners Fund III, LP and Sun Capital Partners Fund IV, LP) were jointly and severally liable for the unfunded vested benefits owed to a multiemployer pension fund by its bankrupt portfolio company, Scott Brass, Inc. In 2013, the First Circuit ruled that a private equity fund can be a “trade or business” for purposes of ERISA, which struck a blow at the private equity industry’s first line of defense to avoiding pension plan withdrawal liability. Now, on remand, the District Court ruled that the two funds cannot avoid ERISA pension liability, even though the two funds split ownership of a company 70%/30% (that is, with neither fund owning the threshold 80% required by the ERISA statute). The court found that the economic reality was that the Sun Capital Funds together formed a partnership-in-fact that owned 100% of the portfolio company and thus are liable for the entire ERISA pension liability.1
1.     The bankrupt portfolio company Scott Brass Inc. was owned by an intermediate holding corporation (formed by the Sun Capital Funds) which was in turn was owned by a limited liability holding company Sun Scott Brass, LLC (formed by the Sun Capital Funds) which in turn was owned 30% by Sun Capital Fund III and 70% by Sun Capital Fund IV.
ERISA’s Two-Pronged Test for Pension Plan Withdrawal Liability:
Two key questions drive the court’s determination of whether a private equity fund will be saddled with the ERISA pension liability of a bankrupt portfolio company: (1) whether the fund is engaged in a “trade or business”; and (2) whether the fund is under “common control” with or has a “controlling interest” of at least 80% in the portfolio company.
1. “Trade or Business”
The First Circuit determined that Sun Capital Fund IV and the District Court held that Sun Capital Fund III, like many traditional private equity funds, were involved in a “trade or business” because the funds were not simply passive investors. Rather, the funds satisfied the First Circuit’s nebulous “investment-plus” standard based on the following facts:

  • The general partners of the two Sun Capital Funds are Sun Capital Advisors III and Sun Capital Advisors IV, and those general partners are each controlled by Sun Capital’s two senior managing principals.
  • Sun Capital’s senior managing principals are also the co-CEOs of Sun Capital Advisors, Inc., which advises Sun Capital Fund III and Sun Capital Fund IV, structures their deals, and provides management consulting and employees to the portfolio companies owned by the Sun Capital Funds.
  • The Sun Capital Funds’ limited partnership agreements and private placement memos explain that the Funds are actively involved in the management and operation of the companies in which they invest.
  • The Sun Capital Funds’ limited partnership agreements give the general partner of each Sun Capital Fund exclusive and wide-ranging management authority.
  • The Sun Capital Funds were able to place employees of Sun Capital Advisors in two of the three director positions at the bankrupt portfolio company, resulting in Sun Capital Advisors employees controlling the bankrupt portfolio company’s board and effectively controlling the management and operation of the portfolio company.
  • Under the Sun Capital Funds’ limited partnership agreements, the applicable general partner is required to make a capital commitment to the Fund, and the Fund is required to pay an annual management fee to the general partner based on a percentage of the Fund’s aggregate commitments or invested capital. The general partner may offset its capital commitment by the amount of any annual management fee that it otherwise agrees to waive.
  • The Sun Capital Funds’ limited partnership agreements also provide for a reduction to the annual management fee payable to the general partner – any fees earned by Sun Capital Advisors and its affiliates and principals from portfolio companies would offset the management fee.
  • When no management fees are owed or the amount of management fee offsets is greater than the management fees owed to the general partner for any period, such fee offset is “carried forward” and can be used to offset future management fees owed by the Sun Capital Funds to their general partners.
  • There was a direct economic benefit to the Sun Capital Funds that an ordinary, passive investor would not derive: an offset or carryforward against the management fees the Funds otherwise would have paid their general partners for managing the investment in the bankrupt portfolio company. In fact, the portfolio company made payments of more than $664,000 to SCP Management IV (an affiliate of the general partners), 30% of which was allocated to Sun Capital Fund III and 70% of which was allocated to Sun Capital Fund IV (based on their pro rata investment amounts). As a result, Sun Capital Fund III was able to obtain the benefit of a management fee offset and Sun Capital Fund IV was able to obtain the benefit of a management fee carryforward.
2. Controlled By or Under Common Control at 80% Level
The District Court determined that Sun Capital Fund III and Sun Capital Fund IV acted like a “joint venture” whose collective stakes exceeded the 80% ERISA liability threshold2 sufficient to demonstrate a controlling interest of the bankrupt portfolio company because:

  • The Supreme Court previously determined for tax purposes that a “partnership” is not limited only to those entities that identify themselves formally as partnerships, but instead can include any persons that join together for the purpose of carrying on business and sharing in the profits.
  • Sun Capital Fund III (which consists of two parallel funds that invest together in the same proportion in each of their investments) and Sun Capital Fund IV, while formally independent entities whose investor groups do not completely overlap, ultimately made their investment and business decisions under the direction of Sun Capital Advisors’ senior managing principals.
  • While the Sun Capital Funds’ co-investment agreements disclaimed any intent to form a partnership or joint venture and contained no obligation for the Funds to act in concert, their limited partnership agreements are almost identical and the Funds are operated similarly.
  • While the Sun Capital Funds prepare and file separate partnership tax returns, maintain separate financial statements and bank accounts, provide separate reports to their partners and have largely non-overlapping sets of limited partners and largely non-overlapping portfolios of companies in which they have invested, the Funds engaged in joint activity to pursue the investment in the portfolio company and to create a limited liability holding company solely for the purpose of making the joint investment in the portfolio company.
  • During the few years before and after their joint investment in the portfolio company, the Sun Capital Partner Funds co-invested in five other portfolio companies, using the same organizational structure, but did not provide any evidence of making joint investments with other outside investors.
  • There was no evidence of disagreement between Sun Capital Fund III and Sun Capital Fund IV over how to operate the limited liability holding company, as might be expected from independent members actively managing a business.

Most telling, the court noted: “Notably, the Funds made a conscious decision to split their ownership stake 70/30 for reasons that demonstrate the existence of a partnership. The Funds assert three motivations for this split: [(1)]that Sun [Capital] Fund III was nearing the end of its investment cycle while Sun [Capital] Fund IV was earlier in its own cycle, [(2)] a preference for income diversification, and [(3)] a desire to keep each Fund below 80 percent ownership to avoid withdrawal liability. With the exception of income diversification, which two truly independent entities could also pursue in parallel but on their own, these goals are instinct with coordination and show joint action. . . [T]hese goals stem from top-down decisions to allocate responsibilities jointly. Entities set up with rolling and overlapping lifecycles and coordination during periods of transition offer advantages to the Sun [Capital] Funds group as a whole, not just to each Fund. And the choice to organize Sun Scott Brass, LLC, so as to permit each of the Sun [Capital] Funds coinvesting to remain under 80 percent ownership, is likewise a choice that shows an identity of interest and unity of decision-making between the Funds rather than independence and mere incidental contractual coordination. A separate entity which is perhaps best described as a partnership-in-fact chose to establish this ownership structure and did so to benefit the plaintiff Sun [Capital] Funds jointly.”

2.     For partnerships and LLCs, a controlling interest is ownership of at least 80% of the profits interest or capital interest of the entity. For corporations, a controlling interest is ownership of at least 80% of the total combined voting power or total value of shares of all classes of stock.
Key Takeaways:
Although this case almost certainly will be appealed, there are several takeaways to consider while we await further guidance:

  • The first test for ERISA liability – the “trade or business” test based on the investment-plus standard – will most likely apply to a private equity fund if the fund is formed as a limited partnership, if the fund’s general partner has its own capital commitment to the fund, if the general partner is owed a management fee that can be offset by portfolio company fees received in connection with its investments (either currently or as a carryforward against future periods), and if the private equity fund derives economic benefits from portfolio company investments more than an ordinary, passive investor.
    • Other, non-traditional investment vehicles (such as those formed by “fundless” or “independent” sponsors) where the person or entity driving the investment decision derives economic benefits from portfolio company investments more than an ordinary, passive investor may similarly be considered a “trade or business” for purposes of ERISA liability. The more these non-traditional vehicles look and operate like private equity funds as a result of their active management of the portfolio company, the ability to earn a management fee, and the ability to obtain other benefits above and beyond return on its equity investment, the greater is the risk of tripping the “trade or business” prong of the test.
  • The second test for ERISA liability – the 80% common control test – cannot be avoided simply by having two or more affiliated private equity funds structure their ownership in an investment vehicle such that no individual fund’s ownership exceeds 80%.
    • Private equity funds that share a general partner or have an agreement or history of investing together in a fixed proportion will likely meet this second prong if their ownership in a portfolio company exceeds 80% in the aggregate (as is typical with “parallel funds”).
    • Private equity funds with different general partners and independent investment portfolios may nonetheless be deemed to be acting under “common control” when the investment decisions of those funds are formally or informally made by the same group or substantially the same group of senior fund managers (as is typical with a fund and its “successor” fund that share in investment opportunities while the first fund’s investment period is still active).
    • Investors who have a “partnership-in-fact” (which is a very fact-intensive analysis) that each own individually less than 80% of a portfolio company, but collectively own more than 80% of such portfolio company, will likely meet the second-prong of the test. While courts will review the written agreements between or among the investors to find evidence of whether the investors have a partnership to act jointly, courts will also review the history of the parties’ actions inside and outside of the particular company investment to determine if the investors have a pattern of taking coordinated actions, acting jointly or otherwise synchronizing themselves smoothly for the benefit of the investor group.
    • Note that shares held by employees, which are typically subject to vesting or rights of first refusal, are not considered outstanding for purposes of the common control analysis. Therefore, if an operating company is owned 70% by a trade or business and 30% by management whose shares are subject to substantial restrictions, the trade or business will be deemed to own 100% of the operating company.
  • Structuring an acquisition in a manner such that unaffiliated third-party investors (with no history of coordination with the private equity fund sponsor) hold greater than 20% of a portfolio company, where the third-party investors have the ability to make their own independent decisions with respect to that investment, should allow the private equity fund sponsor (and the unaffiliated third party) to avoid ERISA liability. This may provide a significant opportunity for private equity funds or other investors who are willing to make minority investments in portfolio companies alongside a private equity fund sponsor. Fund sponsors should also consider whether the co-investors should participate directly in the portfolio company rather than through an aggregator special-purpose vehicle that is sponsor-managed.
Any private equity fund, independent sponsor or other investor that has questions about ERISA withdrawal liability or structuring an upcoming transaction in light of the risks set forth in this update should contact Michael Falk (mfalk@winston.com or (312) 558-7232), Eva Davis (evadavis@winston.com or (213) 615-1719), Brad Mandel (bmandel@winston.com or (312) 558-7218) or any member of your Winston deal team.

Campbell Soup eyeing ‘specific targets’ in all divisions

Provided exclusively by Mergermarket

Campbell Soup (NYSE:CPB) is looking for potential acquisitions in all its business segments, according to CEO Denise Morrison.

On the 4Q16 earnings call held 1 September, Wells Fargo analyst John Baumgartner asked how the company would assess the potential for M&A to accelerate growth in the US snacking market, and if it would look outside the Campbell Fresh segment for deals.

“We do look at M&A more broadly than just Campbell Fresh. And each one of our divisions has mapped out specific targets that they’re interested in, that are a good strategic fit for their businesses,” Morrison said. “We are highly interested in other consumer behaviors like health and well-being, like snacking, like simple meals, that we can pursue not only from an organic growth standpoint but also from an M&A standpoint.”

Asked if the company’s route to market at its Pepperidge Farm brand allowed it to buy smaller artisanal brands, the CEO replied affirmatively.

Plum Organics is a great example of a smaller brand that we bought,” she said. “We were able to integrate that into the Americas Simple Meals and Beverage business and capitalize on things like their sales force and supply chain.”

Campbell reports in the following segments: Americas Simple Meals and Beverages; Global Biscuits and Snacks; and Campbell Fresh.

Campbell said in June last year it would buy Michigan-based Garden Fresh, a provider of branded refrigerated salsa, for USD 231m. In a press release announcing the deal, Campbell said it had added a “trio of growth engines” to its business in the past several years, acquiring Bolthouse Farms in 2012, and organic baby-food company Plum Organics and biscuit company Kelsen in 2013. The release noted that these deals were made in response to increased consumer interest in fresh foods and health and well-being.

Morgan Stanley and Davis Polk & Wardwell advised on the Bolthouse acquisition. Davis Polk has also been used for other domestic deals including Plum, according to the Mergermarket M&A database. Morgan Lewis & Bockius advised on the Garden Fresh transaction. In-country law firms have been used on several occasions, including Bruun & Hjejle for the Denmark-based Kelsen purchase.

Camden, New Jersey-based Campbell has a market capitalization of USD 17.8bn.

As seen in the mergermarket newsletter on 06/09/2016

Private equity shows its mettle over past decade

by Moyagabo Maake,  29 June 2016, 06:20, as seen on BDlive

THE private equity industry in SA more than tripled returns to investors in the 10 years to 2015, a Southern African Venture Capital and Private Equity Association (Savca) survey showed on Tuesday.

Savca CEO Erika van der Merwe attributed the strong showing to the maturing of private equity investments.

Private equity involves the buying and selling of unlisted companies. In 2005, the industry raised R2.2bn from investors. Last year, it returned R8.9bn to investors on roughly the same assets through disposal proceeds, loan repayments, interest and dividends.

“We are at a point where (private equity) funds are mature, and we are seeing a lot of exits,” Van der Merwe said.

Ethos Private Equity dominated Savca’s ranking of the top five disposals in 2015, selling Tiger Wheel & Tyre parent TI Auto to Old Mutual and the Carlyle Group; plumbing supplier Plumblink to Bidvest for R446m; and cashing in the rest of its shares in Transaction Capital, which listed on the JSE in 2012, for R422m.

Over 10 years, the asset class returned 18.5%, outperforming listed equities.

There were also new deals. The sector raised a record R29bn in new funds in 2015, up from R11.8bn the year before. The bulk of it (75.9%) came from SA, the UK contributed 4.6%, with the rest coming from the US and the rest of Africa.

The largest domestic investors were pension funds, which contributed R3.2bn of the total, but Van der Merwe indicated that it could have been more, because few pension funds had taken advantage of a 2011 change in legislation allowing them to invest up to 10% of their assets under management in private equity funds, up from just 2.5% previously.

Savca held two training sessions with pension fund trustees last year, and Van der Merwe concluded that it would take a long time for them to come to grips with the asset class.

Africa has been popular with foreign equity investors for the past 24 years.

Many are seeking out opportunities in infrastructure, with US giants Carlyle and Blackstone announcing multimillion-dollar infrastructure funds.