On the morning of May 30^th, 2007, NHRA.com posted a release on their website stating “a definitive agreement” between the NHRA and an entity called HD Partners Acquisition Corporation (HDP) had been signed whereby all assets related to the professional side of NHRA racing, and rights “to commercialize the NHRA brand,” would be acquired by HDP, and that “upon consummation of the transaction, the acquired assets will be held in a wholly owned subsidiary” of HDP. The agreement provided some details about some of HDP’s principals, some details into the management structure of the future subsidiary, and the major  considerations of the proposed transaction.

The announcement quickly led to an flock of “NHRA Sold” headlines. None  were true because (1) this announcement was peppered with forward-looking statements regarding a proposed acquisition, not a completed transaction as implied by these headlines; and (2) the NHRA was not “sold”—nor can it be (the reasons why to be discussed in a future installment).

The fact this information never leaked out caught this writer completely by surprise and raised questions of its validity. There had been signals for some time that the NHRA had been open to the possibility. While an acquisition had always been possible, the particulars of how such a thing might be executed were not clear.

So many questions came to mind about who and what HDP was, their operations, how this event came to be, what it entailed, and how it would be accomplished. Understanding this acquisition and its future implications would require understanding the details of the underlying process.

Where to begin sorting all this out? The press release contained statements that HDP had completed an initial public offering in June 2006 and mentioned a forthcoming 8-K filing. These statements meant HDP was a public company so there should be a wealth of public information available.

 

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What is HD Partners Acquisition Corporation?

 

HDP was incorporated on December, 6, 2005 under the provisions of Delaware’s General Corporation Law (GCL). The purpose clause of the certificate of incorporation states, “The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.” This is typical language found in all modern corporation codes, often required to be stated verbatim in articles or certificates of incorporation. No surprise here, but also no help.

But a bit deeper into the document was a 5-part clause which applies to the time period commencing with the formation of the corporation

“and terminating upon the consummation of any ‘Business Combination’… . A ‘Business Combination’ shall mean the initial acquisition by the Corporation, whether by merger, capital stock exchange, asset or stock acquisition or other similar type of transaction, of the assets of one or more operating businesses, or one or more operating businesses themselves, in the media, entertainment and telecommunications industries.”

Here was some language used in the announcement. So the company was not looking to start a new business from the ground up, but to acquire an existing business. Was HDP intending to merge the NHRA assets into some other pre-existing business?

The other parts to this clause mentioned that their as-yet unmentioned business plan would be submitted to the stockholders for approval (whether or not such approval was required under the Delaware GCL), stipulated voting requirements for approval, what those who vote against the acquisition may do, and what happens if the business combination was not approved within imposed time limits. Here were statements suggesting questions not yet raised as to the process of this acquisition, but did not address the primary questions of what HDP is and what it does.

HDP’s first filing with the SEC, on December 20^th, 2005, was form S-1,  an “offering registration,” the basic registration statement for securities intended to be offered for public sale. This preliminary statement provides essential facts describing a company’s business, risks, management, financial statements, and other information required by SEC regulations. This begins a statement approval process that will take considerable time, but once completed, becomes “effective” as the final prospectus for what will be an Initial Public Offering (IPO) of the company’s securities.

The prospectus summary began with this statement:

We are a blank check company organized under the laws of the state of Delaware on December 6, 2005. We were formed to effect a merger, capital stock exchange, asset acquisition or other similar business combination within one or more operating businesses in the media, entertainment or telecommunications industries.

Here again is language similar to the announcement. So HDP is a “blank check company.”

A “blank check company” is a financial concept that has been around for decades. Blank check companies are a shell with no operations or tangible assets. They raise capital by selling shares through a public offering for an undefined business purpose, giving the company management a “blank check” to merge with an unspecified operating business.

Let’s jump back to the 1980s, when this concept was frequently used to perpetrate classic “pump-and-dump” scams. A company would execute a blank check offering that created a “penny stock,” defined as stock offered at less than $5 a share. These stocks were unregistered and unregulated because their value was below the threshold of government securities regulations, nor listed on any exchange, so not subject to exchange rules. A typical scam might involve a “boiler room” operation that would push the stock to unsophisticated investors by hyping a fictitious merger in order to sell, and then speculatively drive-up the stock value. The perpetrators would cash out and disappear before the unsuspecting investors knew that there was no actual market for their worthless stock.

 

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These and other abuses were so bad that by 1990, 36 states enacted regulations that either prohibited blank check operations, or were so restrictive that blank check companies were practically outlawed. But Congress saw that blank check shells had some potential for legitimate growth, if properly regulated, and responded with the Penny Stock Reform Act of 1990. Regulation was primarily through expansive disclosure requirements so that investors were not “in the dark” about the details of such transactions in the belief that “sunlight was the best disinfectant” for blank check abuses, and by implementing a series of investor protection measures that regulated the process of these merger transactions financed by penny stocks. These regulations became codified under Title 17 of the U.S. Code of Federal Regulations (CFR), Part 230.419 (17CFR230.419), known in the financial world (and for our purposes) simply as Rule 419.

Over 2,700 blank check offerings occurred from 1987 to 1990, prior to the new law, but after the new regulations become effective, there were less than 15 in the early 1990s. The new regulations effectively stamped out the rampant fraud, but made the blank check vehicle so restrictive that it was unattractive for its legitimate purpose. Many federal regulators and state’s attorney generals would have been very happy if that situation remained the status quo.

But in 1992 a small cadre of enterprising lawyers and securities underwriters set out to create a blank check offering that would bypass the oppressive restrictions of Rule 419. What they devised was a new investment vehicle called a special purpose acquisition company or SPAC (more recently the word ‘specific’ is coming into vogue, replacing ‘special’). The term was created by EarlyBird Capital, Inc., who claimed it as a trademark for their version of this financial product which would become a template for later SPAC transactions. Like the Rule 419-restricted blank check companies, a SPAC intends to purchase a business with funding from a public stock offering. Unlike them, a SPAC is structured to be technically exempt from the restrictions of Rule 419, but provide investor protections acceptable to the SEC and other regulators by voluntarily adopting most of Rule 419’s provisions, as well as adopting other self-imposed restrictions outside of the Rule.

Between 1992 and 1998, there were 21 new SPAC registrations. A SPAC offering is a complex and time-consuming method of tapping into capital markets, and in the late 1990s, with the dot com boom in full swing, capital was easier to obtain by other methods. As a result, there were no SPAC registrations between 1998 and 2002. Then the dot com bubble burst, and the markets were rocked by the corporate and accounting scandals that included WorldCom, Tyco, and Enron/Arthur Andersen. Congress responded with the massive Sarbanes-Oxley Act of 2002. Equity sources were scarce and investors were wary. What vehicle could satisfy safety concerns and offer potential returns and that would loosen up capital markets? The SPAC was resurrected. In 2003 there was one SPAC registration, 14 in 2004, 27 in 2005, 40 in 2006, and by May of 2007, at the time of the HDP/NHRA announcement, there had been a total of 85 SPAC registrations since 2003 worth somewhere north of $7 billion. One of those new companies planning to make its offering in the class of 2006 was HDP.

So HDP is a contemporary, post-Rule 419 reincarnation (from now on, simply “419”), of the blank check company now known in the financial world as a SPAC. The term “blank check company” is still used in the regulations (as seen in HDP’s formal filings, although SPAC was used once in its definitive proxy statement), defined in the CFR under the amended 419 subsection as “a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person.”

It is a “development stage company” because it has no business, no operations, and no history as a guide for potential investors to gauge performance. HDP is a blank slate, an empty shell. But being newly organized, it is a “clean” shell because it has no liabilities from any previous business operations or affiliations. HDP’s purpose is to conduct a successful IPO, then use those proceeds to complete a business combination, thus filling the empty shell with an existing operating company. This entire process, from offering to successful consummation and closing (or failure and subsequent dissolution) will be regulated by voluntarily submitting to, and even exceeding, the provisions of 419, and other voluntary and statutory restrictions (appropriate distinctions will be made as they occur in the discussion of the process).

We now know what HDP is, what it’s purpose is, and what it must do to accomplish that purpose. Let’s get back to December of 2005 and the preliminary S-1 filing to learn how they intended to do it…

The S-1 states HDP intends to conduct an IPO offering 10,000,000 units consisting of one share of common stock and two warrants at $6.00 per unit to raise $60,000,000. This figure is probably not arbitrary. HDP and the underwriters were anticipating HDP securities being listed on the American Stock Exchange (AMEX)—adding a badge of respectability to the vehicle and the offering. The AMEX requires IPOs be for a minimum of $60M. Since the company has been in operation less than 3 years, and net assets after the offering will exceed $5M, and the share price is greater than $5 (therefore not a “penny stock” under 419), the offering is technically exempt from the restrictions of 419.

A warrant entitles the holder to buy a share of common stock at a future time at a set price below the offering price. Under 419, warrants imply a potential continuing issue of stock. That means a 10M unit offering contains 10M common shares, and with two warrants in each unit, it has a future potential of an additional 20 million common shares—30 million total from the offering

As noted earlier, this registration statement is preliminary and begins an approval process by the SEC during which some interesting things happened along the way. This disclaimer appeared at the very top of each revision of the prospectus during the approval phase:

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.

 

The approval process for registration statements can be monitored in the public domain where the correspondence between the SEC and the company can be read, and the changes made to the amended statement can be followed as each revised version is produced. True, HDP could not yet sell the offering in the sense of actually issuing stock, but since the prospectus approval process could be openly tracked, the process itself becomes a marketing tool, pre-selling the offer to those who would eventually buy the units.

Which begs the question: Who would be interested in securities from a company that is just a shell? Answer: Institutional investors, particularly hedge funds, which are a kind of unregulated mutual fund intended to meet a broad array of investment goals for sophisticated, accredited investors (e.g., rich individuals, other funds, pension funds) utilizing advanced investment strategies. Some funds like SPAC offerings because their structure (assuming or exceeding 419 restrictions) limits downside risk, making them a safe place to park assets until a better opportunity comes along; or because of other derivative vehicles that can be created from the offering with the potential for much higher-than-average returns—along with much-higher-than average risk of large losses.

As the approval process continues, members of the HDP management team and the underwriters are conducting “road show” presentations to institutional investors about the pending offer. The $60M figure, as noted above, is a minimum for AMEX listing, but was probably also chosen to test how the offering would be received in the financial community. Based on the response received during the road show, HDP and the underwriters decided to increase the offering in April 2006 from 10,000,000 to 12,500,000 units, each unit now consisting of one common share and one warrant, with the intended offering price raised to $8.00 per unit, increasing the total offering from $60M to $100M.

And they did it again in May, increasing to 18,750,000 units with the one share/one warrant structure, raising the offering to $150M. After assuring the SEC that the offering would not be increased again, the prospectus was declared effective on June 2^nd, 2006 after undergoing eight rounds of review-and-revision, taking over five months to complete. HDP units were listed on AMEX as of June 2^nd, and the IPO was completed for the full $150M on June 7^th.

What was it that these institutional investors and underwriters saw that made them willing—prior to an approved prospectus or the IPO—to make firm commitments they would buy all available securities from a company with no business, no operations, and no prospects (the company cannot identify, let alone solicit for target businesses, until the IPO is completed)? There is an adage that in SPAC offerings, investors bet on the jockey, not the horse. So at this point in the process, what they were willing to bet on, and buy into, was HDP’s only asset: their management team.

 

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Who Is HDP?

 

The original five founding members and officers of HDP are:

Eddy W. Hartenstein, Chairman, President and Chief Executive Officer,

Robert L. Meyers, Chief Financial Officer, Treasurer and Director,

Bruce R. Lederman, Executive Vice President and Secretary,

Lawrence N. Chapman, Executive Vice President, and

Steven J. Cox, Executive Vice President and Director

 

Each share the common element of having been part of the strategic management team of DirecTV (DTV). A selected and decidedly abridged history:

The sprawling Hughes Corporation (that’s Hughes, as in, Howard Hughes) was a major supplier to the military and aviation in 1972 when it hired a new engineer named Eddy Hartenstein, fresh out of Cal State Polytechnic University, as a Masters Fellow while he attended the California Institute of Technology, the academic home of NASA’s Jet Propulsion Laboratory. He moved quickly through a succession of engineering and operational program management positions in the Hughes Space and Communications Division, and then into the board room as a Vice President of Hughes Communications, where he was responsible for development and marketing of a satellite fleet to the broadcast TV and cable industries. In 1985 Hughes had been sold to General Motors (GM) which was hoping to apply Hughes technology into its cars. In 1989, Hartenstein, now Senior Vice President of Hughes Communication, and a staff of eight engineers, developed a new kind of satellite and signal transmission system that would allow broadcasting a large number of channels directly to small rooftop dishes. DirecTV’s corporate birth (formerly Hughes Electronics Corp.) was in 1990, but suffered numerous operational setbacks until its product was ready for its official debut in 1994. Hartenstein was Chairman and CEO of DTV from its inception and personally assembled the management team that oversaw the various component companies of the enterprise.

Also joining Hughes in 1972, Lawrence Chapman came to hold a number of business development positions in various Hughes companies, including joint ventures with several Japanese satellite and communications companies. He was Senior Vice President for each of Programming, Special Markets and Distribution, and Business Affairs throughout his tenure. When Hughes became DTV, he become President & Chief Operating Officer of DTV Latin America.

Robert Meyers, also with the Hughes organization since 1972, served in numerous financial positions with a long list of various Hughes companies and divisions. He was added to the DTV team in 1996 as an Executive Vice President responsible for installation & service networks and customer service/satisfaction/retention.

Steven Cox came aboard in 1995 as Vice President of Business Affairs and General Counsel, then becoming Senior Vice President of New Ventures, which structured and negotiated all DTV strategic partnerships, acquisitions, investments, new business opportunities, and managed all legislative and regulatory affairs. In 2001 he became Executive Vice President of DTV, responsible for all aspects of sales and distribution.

By 2001, DTV had a higher market capitalization than its GM parent. GM was in financial turmoil, and DTV was for sale. There were several suitors, including Rupert Murdoch, who was assembling his ultimate dream—Sky Global Networks—a satellite system capable of delivering content to virtually the entire world, but lacking a U.S. component. Murdoch’s News Corporation acquired DTV in 2003. Hartenstein, then 54, retired as Vice Chairman from DirecTV at year’s end in 2004, because, rumor had it, he was being pushed aside by News Corporation management. Chapman had retired in August; Meyers also retired in 2004. Cox left in 2005. But that didn’t mean they went off to lead the life of leisure. Each is involved in other ventures and companies:

 

• Hartenstein is on the Board of Directors of

- Thomson S.A., formerly Thomson Multimedia: a French company providing preparation and distribution of video content including analog film or DVD, and digital cinema and video-on-demand;  network services and equipment to broadcasters, retailers, cinema exhibitors; and access products to satellite and cable network operators and to telecom operators.

- SanDisk Corp., world’s largest supplier of flash storage products and second largest producer of MP3 players.

- XM Satellite Radio Holdings, Inc., a satellite-delivered broadcast and data services company for the automotive market.

- the Consumer Electronics Association.

Hartenstein is also involved in the management of a number of investment fund companies.

 

• Cox is on the Board of Directors of MDU Communications International, Inc., an end-to-end provider of digital satellite TV programming, high-speed Internet/premium communication and content to multi-dwelling units.

 

• Meyers is an advisor to Jeter & Associates, a company that trains executives to become proficient in computer technology in an office environment devoid of administrative assistants.

 

• Bruce Lederman had been chief outside counsel to Hughes Communications for 25 years with the firm of Latham & Watkins until he retired in 1999. His specialty was acquisitions and joint ventures in communications. He presently is involved with Industrial Equity Capital, LLC, and Value Investments (from which HDP rents office space and administrative services until the transaction consummates).

 

James E Meyer is not a founding member. He has been the President of Operations and Sales at Sirius Satellite Radio since 2004, and is being offered as an HDP board nominee, expected to replace Robert Meyers if the acquisition is approved. He is also President of Aegis Ventures, a general management consulting firm. He, too, had been involved with Thomson Multimedia in several capacities for over 23 years, including the period when DTV was a client.

The combined biographies of this group reads like a Who’s Who of the communications satellite industry, from design and implementation of satellite systems, to development, marketing, and distribution of content, to development of ancillary consumer hardware, as well as lobbying and interaction with lawmakers and regulators at all levels of government.

In April of 2006, Henry Goldberg and Martin E. Gottlieb were added to the HDP Board of Directors. Neither appears to have been directly involved with DTV.

Goldberg is a lawyer specializing in telecommunications and information technology law that includes membership in, or chairmanship of, various national and international bar associations specializing in communications law. He was Deputy General Counsel and General Counsel for the White House Office of Telecommunications Policy in the Nixon and Ford administrations.

Gottlieb’s background is in banking and investment banking. He presently is Managing Director of Argent Group Ltd., a boutique investment banking firm specializing in structuring and arranging financing for projects involving large-ticket assets -- recently, ships.

 

Combined, the eight hold these credentials:

 

• The engineers: Hartenstein holds a BS in Aerospace Engineering, a BS in Mathematics, and an MS in Applied Mechanics. Chapman a BS and MS in Electrical Engineering.

• The MBA holders are: Cox, Gottlieb, Meyer, and Meyers.

• The lawyers in the group are: Cox (BS in Business Admin, Univ. Illinois; JD, Stanford); Goldberg (AB Boston Univ., cum laude; LLB, Columbia); and Lederman (LLB, Harvard, cum laude). Lederman and Cox share a common relationship with the law firm of Latham & Watkins where Lederman had been a partner and a co-founder of their communications practice; Cox was a later associate.

• Lederman attended the London School of Economics and also holds a BS in Economics, cum laude, from the Wharton Business School at Penn.

 

All have held senior management positions outside the field of their formal educational backgrounds.

 

A partial Who’s Who of the companies this group has related with includes:

major league sports

AOL

ATT

a vast array of TV networks

Bank of America

Best Buy

BMW

C. Itoh

Cablevision

Chrysler

Circuit City

Converse

Creative Artists Agency

CVEO

Delphi

DISH Network

Digital Equipment Corp

Disney

EchoStar Communications

First National Bank of Chicago

Ford

GE

Gemstar

GM

GTE

HDNet

IBM

Kenwood

Lucent

Microsoft

Mitsui

Rupert Murdoch

NASA JPL

NeTunes Communications

Nike

Phillips

Primestar

Radio Shack

RCA

TimeWarner

TiVo

Toshiba

Uniden

Western Union