Solved: Hot Stuff Case Study

Hot Stuff, an SEC registrant and a hospital operator in the United States, entered into a merger agreement to acquire Mississippi Corporation.

Mississippi Corp. is an unrelated third party that operates specialty hospitals focused exclusively on cardiology. The merger closed on January 31, 2017 (the “Closing”), whereby Hot Stuff acquired all of the outstanding common stock of Mississippi Corp., and Mississippi Corp. became a wholly owned subsidiary of Hot Stuff (the “Acquisition”).

In 2013, in a public offering, Mississippi Corp raised capital to expend and upgrade its operating rooms by issuing $400 million aggregate principal amount of 7.00% senior notes due in 2023 (“the Notes”). In performing due diligence and assessing the terms of the Notes, Hot Stuff determined that it could obtain cheaper financing and instructed Mississippi to make a tender offer for any and all its outstanding Notes (the “Tender Offer”).

Accordingly, contemporaneously with the Closing, all of the outstanding Notes were redeemed. Mississippi did not have sufficient cash on hand before the Acquisition to redeem the Notes.

Additional Facts:

The acquisition meets the definition of a business combination.

The terms of the Notes did not require Mississippi Corp to redeem or offer to repurchase the Notes upon a change in control (i.e., the decision to redeem the Notes was voluntary).

It was solely Hot Stuff’s decision to redeem the Notes.

The fair value of the Notes as of the date of the Closing was equal to the amount paid to redeem the tendered Notes.

In addition, Mississippi Corp. carried the Notes at their par value. Required: Should Mississippi Corp. include the extinguishment of debt (i.e., the Notes) in its pre-combination financial statements or should Hot Stuff include it in the post-combination consolidated financial statements?

Your response MUST discuss the pros and cons of EACH alternative. Additional Notes to Consider

When appropriate be sure to include ASC reference points. Use them (and cite them) whenever possible.

Properly cite all references to articles, journals, websites. Keep in mind that your text is not an authoritative source.