Endeavour Films is a production company that produces movies and television shows. It also owns cable television systems that broadcast its movies and television shows. Endeavour transferred to Barco Ltd. its cable assets and the shares in its previously owned and recently acquired cable television systems, which broadcast Endeavour’s movies.
Barco assumed approximately $200 million in debt related to certain of the companies it acquired in the transaction.
After the transfer date, Barco acquired additional cable television systems, incurring approximately $2 billion of debt, none of which was guaranteed by Endeavour.
Barco was initially established as a wholly owned subsidiary of Endeavour. Several months after the transfer, Barco issued common shares in an initial public offering, raising nearly $1 billion in cash and reducing Endeavour’s interest in Barco to 41%. The remaining 59% of Barco’s voting interest is widely held.
The managing director of Barco was formerly manager of broadcast operations for Endeavour. Half the directors of Barco are or were executive officers of Endeavour.
Barco and its subsidiaries have entered individually into broadcast contracts with Endeavour, pursuant to which
Barco and its cable system subsidiaries must purchase 90% of their television shows from Endeavour at payment terms, and other terms and conditions of supply as determined from time to time by Endeavour. That agreement gives Barco and its cable television system subsidiaries the exclusive right to broadcast Endeavour’s movies and television shows in specific geographic areas containing approximately 45% of the country’s population. Barco and its cable television subsidiaries determine the advertising rates charged to their broadcast advertisers.
Under its agreement with Endeavour, Barco has limited rights to engage in businesses other than the sale of
Endeavour’s movies and television shows. In its most recent financial year, approximately 90% of Barco’s sales were
Endeavour movies and television shows. Endeavour provides promotional and marketing services and consultation to the cable television systems that broadcast its movies and television shows. Barco rents office space from Endeavour in its headquarters facility through a renewable lease agreement, which will expire in five years.
Required
(a) Should Endeavour consolidate Barco? Why or why not?
(b) If Endeavour had not established Barco but had instead purchased 41% of B arco’s voting shares on the open market, does this change your answer to requirement A? Why?