Harris Corporation Discloses Structure of Promissory Note and Earnout Provision in Sale of Broadcast Communications Division

Posted by Joe Zaller
Dec 06 2012

When Harris Corporation announced earlier today that it had signed an agreement to sell its Broadcast Communications Division (Harris BCD) to The Gores Group (TGG), the company said that the terms of the deal included “a cash payment of $160m, a $15m subordinated promissory note, and an earnout of up to $50m based on future performance.”

Harris Corp subsequently issued a regulatory filing that provides more detail on the promissory note and the terms of the earnout.

The $15m subordinated promissory note is payable fifteen months after closing, accrues simple annual interest at six percent, and is unsecured.

The terms of the earnout state that in each of the four calendar years from 2013 through 2016, Harris Corporation will receive a contingent payment (in cash) of twenty percent of the revenue of Harris BCD that is in excess of a specified target revenue amount.

The target revenue amount required to trigger the contingency payment to Harris Corporation was not specified, so it is difficult to judge how likely it is that the payment will be triggered.

This contingent payment amount is subject to an annual cap of $25m in each calendar year (2013 – 2016).

In the event that Harris BCD’s revenue would have caused the contingent payment in any such year to exceed $25m, the contingency payment will be carried forward and credited as revenue in the next year.

The total value of the contingency payment cannot exceed $50m over the period of the agreement.

Harris said that the target amount required to trigger the contingency payment could be lowered in the event of a sale or divestiture by TGG of parts of Harris BCD including a business unit, product line or substantial portion of its consolidated assets.

These provisions are not uncommon in M&A deals.  Indeed when Technicolor sold Grass Valley to Francisco Partners in 2010, a similar arrangement was put in place.

Under the terms of the Technicolor deal with Francisco Partners:

  • An $80m promissory note was issued to Technicolor with a six-year maturity and bearing a capitalized interest of 5% per year
  • Technicolor has the right to receive “additional consideration from [Francisco Partners] based on the potential future remuneration of the new owners of the disposed entity.”  However the amount of remuneration was not disclosed.

 

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Related Content:

Harris Corporation to Sell Broadcast Business to The Gores Group for $225 Million

Harris Press Release: Harris Corporation to Sell Broadcast Communications to The Gores Group for $225 Million

Harris Corporation 8-K Filing

 

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