EC, September 27, 2009, No M.5590

Dear Sir/Madam,

Subject:  Case No COMP/M.5590 – 3i GROUP / H.I.G. CAPITAL / VOLNAY B.V.

Request for a derogation pursuant to Article 7(3) of Council Regulation No 139/2004

1. Reference is made to the application of 20 July 2009 ("the Application") made by 3i Group plc ("3i") and H.I.G. Europe Capital Partners, L.P., and Bayside Debt & LBO Fund II, L.P. (collectively referred as to "HIG") for a derogation from the suspension obligation provided for in Article 7(1) of Council Regulation (EC) Nº 139/2004 (the "EC Merger Regulation") with regard to the proposed acquisition by 3i and HIG of joint control over Volnay B.V. ("Volnay", the Netherlands) pursuant to Article 7(3) of the  EC Merger Regulation which has been notified on 13th July 2009.

I.  THE PARTIES AND THE OPERATION

 2. 3i is a UK-based private equity house and venture capital company that provides management advice and management services to investment funds.

3. HIG is a private investment firm with funds in private equity, venture capital, distressed debt, real estate and public equities. The funds of the HIG group which are to invest in relation to the Proposed Transaction are H.I.G. Europe Capital Partners, L.P. and Bayside Debt & LBO Fund II, L.P.

4.  Volnay is currently a controlled portfolio entity of the 3i Group. Volnay is active, through its indirectly wholly-owned subsidiary VNU Media, in the publishing of magazines and the operation of websites. VNU Media is active only in the Netherlands and employs approximately 350 people.

5.  The transaction will result in the acquisition of indirect joint control over Volnay by 3i and the HIG through their equal 41% shareholdings in a holding company (Vouvray Luxco I) which, through a series of intermediate steps, will acquire all the issued and outstanding shares of Volnay. The management of VNU Media will indirectly acquire through the same structure, the remaining 18% of the shares in the share capital of Volnay.

6. To this end, 3i and HIG will enter into an investment agreement which will give rise to joint control over Volnay because of the following:

- the Board of Vouvray Luxco I will have three (3) directors, two (2) of which will be appointed by each of 3i and HIG  the quorum of the Board of Vouvray Luxco I requires the presence of each of the appointed directors of 3i and HIG;  all resolutions of the Board of Vouvray Luxco I require the approval of each of the appointed directors of 3i and HIG; and the Board of Volnay may not adopt any resolution or take any action which is a Reserved Matter as defined under the draft investment agreement, such resolution requiring the confirmatory votes of each of the directors appointed by 3i and HIG. Reserved matters include the approval of the business plan and the adoption or amendment of the budget.

The draft investment agreement does not contain any provision for the resolution of any deadlock.

7. On 13 July 2009, the parties have notified the proposed concentration to the Commission, pursuant to Article 4 (1) of the EC Merger Regulation.

II.   THE APPLICATION FOR DEROGATION

8. 3i and HIG submit that Volnay is in a very grave financial condition that can lead to its insolvency the week of […].

9. In 2007, Volnay entered into a credit agreement for EUR […] million with approximately 17 lenders including […] and […]. In addition to this loan, […] and […] also provided separately cash pooling, overdraft and letter of credit facilities. The latter are for relatively small amounts (around EUR […] million) and are linked to the credit agreement, so a default under the credit agreement will also constitute a default under these separate facilities.

10.  Pursuant to the credit agreement, Volnay had a series of financial covenants to meet each quarter. It became apparent in January and February 2009 that Volnay would not be able to meet its financial covenants for the period ending […]. This resulted in a default  under  the  credit  agreement.  Volnay  and  its  lenders  entered  into a standstill agreement in February 2009, where the lenders agreed not to take any action in respect of the default and allowed Volnay time to come up with a restructuring plan1.

11. As part of this process, Volnay prepared a medium term plan which forecasted its cash needs over the next three years and a half. The plan revealed a cash need of EUR […] million during this period. Volnay, 3i, HIG and the lenders then entered into negotiations which have resulted in an agreed restructuring plan.  Under this plan, 3i  and HIG have agreed to provide the required EUR […] million funding. This fresh cash will be used to enable Volnay to continue its operations.

12. The restructuring plan is dependent on the HIG Funds acquiring joint control over Volnay and investing cash in the company. HIG and 3i have submitted that, from a  legal perspective, obtaining either a derogation or a clearance decision from the Commission is a necessary condition for implementing the restructuring plan and the injection of cash by HIG2. Otherwise the restructuring plan will not be implemented.

13.  Furthermore, the parties have provided a document dated 8 July forecasting the cash position of VNU Media over the following […]. According to this document, VNU Media will run out of money the week commencing […].

14.  3i and HIG submit that if Volnay does not urgently receive an injection of cash, it will not be able to make all payments due to creditors the week of […]. Since the financial position of Volnay was made public, Volnay has been forced to pay all its creditors/suppliers on time to show its creditors that it could meet its obligations under the various contracts to which it is a party.

15. There is no mandatory rule of Dutch law obliging management to file for formal insolvency within a certain period of time after the company having become insolvent. However, the management of an insolvent company which continues operating notwithstanding its insolvent nature faces the risk of incurring personal liability towards unpaid creditors, if such payment obligations arose at a time where it must have been clear to the management that the company would be unable to meet such obligations.

16.  The parties believe that there is no doubt that Volnay is balance-sheet insolvent and is about to become cash-flow insolvent as well in the course of […]. 3i and HIG therefore submit that management cannot responsibly continue operations and refrain from seeking formal insolvency protection, unless it has reason to believe that a solution for the financial problems of the company is available and may be implemented in time to address the existing financial difficulties.

17.  This is a situation that management, acting as it should, cannot allow to persist for […], due to the constant risks of external creditors filing for bankruptcy of the company and to its responsibility towards creditors to cease operations once it no longer believes

18.  Accordingly, 3i and HIG have submitted a reasoned request for derogation from the suspension obligation provided for in Article 7(1) of the EC Merger Regulation, in  order to be allowed to inject the necessary new equity money to allow the business to survive.

IV. THE CONDITIONS FOR DEROGATION PURSUANT TO ARTICLE 7(3)  OF THE EC MERGER REGULATION

19.  Pursuant to Article 7(1) of the EC Merger Regulation, a concentration falling under that Regulation shall not be implemented either before its notification or until it has been declared compatible with the common market. Pursuant to Article 7(3) of the EC  Merger Regulation, the Commission may, on the basis of a reasoned request, grant a derogation from the obligation imposed by Article 7(1) of the EC Merger Regulation.

20. Article 7(3) provides that, in deciding upon the request, the Commission must take into account, inter alia, the effects of the suspension on one or more undertakings concerned by the concentration or on a third party and the threat to competition posed by the concentration.

21.  Derogation from the obligation to suspend concentrations is granted only exceptionally, normally in circumstances where the suspension required under the EC Merger Regulation would cause serious damage to the undertakings concerned by a concentration or to a third party.

A.  The operation falls under the suspension obligation pursuant to Article 7(1) of the EC Merger Regulation

22.  The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 billion3 (3i: EUR 13,702 million; HIG: EUR 4,657 million). Each of them has a Community-wide turnover in excess of EUR 250 million (3i: EUR  11,862 million; HIG: EUR 306 million), but they do not achieve more than two-thirds of their aggregate Community-wide turnover within one and the same Member State.

23.  The proposed transaction therefore constitutes a concentration within the meaning of Article 3 of the EC Merger Regulation and has a Community dimension according to Article 1 thereof. Hence, the transaction falls under the suspension obligation laid down in Article 7(1) of the EC Merger Regulation.

B.  The effects of the suspension on the undertakings concerned and third parties

24. On the basis of the information available, it seems that Volnay will run out of cash the week commencing on […] and that, as a result of this event, there is a clear risk of becoming insolvent shortly afterwards.

25. On the other hand, the shareholders and the lenders of Volnay have agreed a restructuring plan that intends to ensure that Volnay remains operational over the next […]. This restructuring plan consists of, inter alia, a cash injection which will take  place only upon receiving either a derogation or a clearance decision under the Merger Regulation.

C.  The threat to competition posed by the concentration

26. Based on the information provided by the parties, VNU Media is a publisher of various consumer magazines and operates various websites. According to previous Commission decisions, the relevant product markets in which VNU Media operates comprise of:

(i) the reader market for magazines, with potential further sub-division by topic; (ii) the market for the sale of offline advertising space, and (iii) the market for the sale of online advertising space, which may be divided by topic and also by the method of the online advertising.

27. In light of the previous decisions of the Commission with respect to these potential relevant product markets, 3i and HIG submit that, for the purposes of this notification, the relevant geographic markets are national. VNU Media is active only in the Netherlands.

28.  None of the companies controlled by 3i or HIG are active in the relevant product and geographic markets identified above. Neither do the parties own minority shareholdings in any companies active in these markets.

29.  Accordingly, there are neither horizontal nor vertical overlaps between the parties’ activities under any possible market definition, including on the narrowest possible definitions previously considered by the Commission. Therefore, 3i and HIG submit,  the transaction will not have an impact on any markets within the Community, or for that matter, anywhere else in the world. On this basis, the transaction, which was filed on 13 July 2009, is being treated under the simplified procedure.

30. In view of these aspects, and without prejudice to its final position, the Commission takes the view that prima facie the proposed acquisition is not likely to significantly impede effective competition in the common market or a substantial part of it.

D.  Balance of interests

31. Based on the above, it can be expected that the proposed acquisition will not give rise to competition concerns. Furthermore, the parties have provided evidence that VNU  Media will run out of cash the week of […] and that its shareholders and lenders have agreed a restructuring plan whose implementation is conditional on obtaining either a derogation or a clearance decision under the Merger Regulation.

32.  Under these circumstances, the Commission concludes that the benefits for Volnay which could follow from the immediate implementation of the concentration outweigh the potential competition concerns raised by the operation.

VI.  CONCLUSION

33. Based on the above considerations and in accordance with Article 7(3) of the Merger Regulation, HIG and 3i are granted a derogation from the obligations imposed by Article 7(1) of the Merger Regulation until the acquisition has been declared compatible with the common market by means of a decision pursuant to Article 6(1)b or 8(2) or a presumption pursuant to Article 10(6).

FOOTNOTES

1   The preparation of this plan has taken time in particular since it required the involvement of all 18 participating lenders which had first to agree on the suspension of the events of default and then, the plan itself. Also, the co-investmenr deed with HIG required the agreement of the lenders.

2  According to Clause 2(1)(a) of the draft Investment Agreement: "Completion of the transactions contemplated by this Agreement (including the investments by the relevant parties as set out in clause 3) is conditional on: The European Commission (the EC): (…)(ii) taking a decision that allows the parties to complete the Transaction without thereby attaching any conditions or obligations that are not on terms satisfactory to the 3i Investors and HIG." there is a serious prospect of recovery. In this context, it is submitted that time is of the essence.

3  Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Consolidated Jurisdictional Notice (OJ C95, 16.04.2008, p1).