Corp Restructuring

7/30/2019 Corp Restructuring

1/22

Split-off, Carve-outs & tracking stock

Mehak Nanda

Roll No.14


2/22

Split-Off

Split-offs are a type of reorganization where thestock of a subsidiary is offered in exchange forshares in the parent company.

In a split-off, the parent company offers its

shareholders the opportunity to exchange theirParentCo shares for new shares of a subsidiary(SplitCo).

This tender offer often includes a premium to

encourage existing ParentCo shareholders toaccept the offer.

Example- ParentCo might offer its shareholders $11.00worth of SplitCo stock in exchange for $10.00 of ParentCostock (a 10% premium).


3/22

Split-Off

If the tender offer is oversubscribed, meaning thatmore ParentCo shares are tendered than SplitCoshares are offered, the exchange is conducted ona pro-rata basis.

If the tender offer is undersubscribed, meaningthat too few ParentCo shareholders accept the

tender offer, ParentCo will usually distribute theremaining unsubscribed SplitCo shares pro-ratavia a spin-off.


4/22

Are Split-offs similar to Spin-offs?

A split-off differs from a spinoff, as theshareholders in a split-off must exchange theirshares of stock in the parent company in order to

receive shares of the subsidiary, whereas theshareholders in a spin-off do not need to trade intheir shares in order to receive shares in thesubsidiary.


5/22

Example of Split-off

McDonalds (MCD) split off of Chipotle Mexican Grill: In September 2006, McDonalds offered to exchange

up to an aggregate of 1,65,39,967 shares of Chipotleclass B common stock for outstanding shares ofMcDonalds common stock.


6/22

The exchange offer was designed to permit holdersof McDonalds common stock to exchange theirshares for shares of Chipotle class B commonstock at a 10% discount to the calculated per-sharevalue of Chipotle class B common stock.

Meaning thereby, for each $1.00 of McDonalds

common stock accepted in the exchange offer, thetendering holder would receive approximately$1.11 of Chipotle class B common stock, based oncalculated per-share values.


7/22

Equity Carved out

In an equity carve-out, the parent company(ParentCo) sells a portion of its interest(equitystock) in a subsidiary (SubCo) to the public in aninitial public offering.

Also known as an IPO carve-out or Split off IPO.

A newly publicly listed company is created, but the

parent keeps a controlling stake in the newlytraded subsidiary.

Subsidiarys shares are offered for sale for

increasing cash inflow.


8/22

The management system for operating the assetsis likely to be restructured in this new public entity.

Financial reports are issued on the subsidiary

operations and are studied by financial analysts asreports of a separate entity.

A carve-out is a strategic option a parent firm maytake when one of its subsidiaries is growing fasterand carrying higher valuations than other businessowned by the parent.


9/22

Company before Equity carve-out

Company A without subsidiary B

Subsidiary B

Stock Market


10/22

Company after Equity carve-out

Company A without subsidieary B

Portion ofSub B equity

Not sold

Stock Market

X % ofCompanyB shares

X % of sub B equity soldTo market for cash

In IPO


11/22

Difference between Equity

carve-out & Spin off

Spin-off Equity carve-out

Distribution is made pro-rata to

shareholders of the parentcompany as a dividend a form ofnon-cash payment toshareholders.

Stock of subsidiary is sold to the

public for cash which is receivedby the parent company.

Parent company has no longer

control over the subsidiary assets.

Parent company generally sell

minority in the subsidiary(usually20% or less) and maintain controlover subsidiary assets andoperations.


12/22

GM-Delphi Carve-Out

In 1991 GM organized separate automotive partsoperations into the Automotive ComponentsGroup with the intent to improve competitivenessand then penetrate new markets.

In 1995, group was renamed Delphi AutomotiveSystems.


13/22

During these years Delphi was able to gain a fullunderstanding of the design, engineering,manufacture and operation of all aspects of theautomotive vehicle.

Soon Delphi began to transform its business froma captive component supplier to GM to a supplierof components and integrated systems to everymajor manufacturer of light vehicles in the world.

From 1993 to 1998, Delphis sales to customersother than GM grew from 13.3% to 21.4% of totalsales.


14/22

In 1998, GM board of directors determined that itwould be in best interests of all involved toseparate Delphi from GM.

BODs believed that Delphi would not be able toreach its full business potential with other

manufacturers as long as it remained part of GM.

Therefore, Delphi was incorporated in September1998.

In February 1999, Delphi completed its IPO of 1billion shares of common stock(17.7% equitycarve-out) while GM held the remaining 4.65

b(82.3%) ofDelphis outstanding stock.


15/22

Tracking Stock

Also known as targeted stocks, are a class ofparent company stock that track the earnings of adivision or subsidiary.

When a parent company issues a tracking stock, allrevenues and expenses of the applicable divisionare separated from the parent company's financialstatements.

It is typically distributed as a dividend toshareholders in the parent company.


16/22

Oftentimes, this is done to separate a subsidiary'shigh-growth division from a larger parent

company that is presenting losses.

The financial reporting is separate for the TS fromthe parent but the control remains in the hands of

the parent company.

Target stock structure does not alter board or

director composition or management control ofthe corporation.

Now, TS as a corporate restructuring tool had

disappeared altogether.


17/22

Example of TS Several years ago, Sprint had a cell-phone division called

Sprint PCS.

Because PCS was growing faster than the traditionalphone business (affectionately known as Sprint FON tostockholders), it was considered more valuable.

So, the company announced that it was going to create atracking stock so the market could value that particulardivision as opposed to having it absorbed in the company.


18/22

Each Sprint shareholder was given 1 share of

PCS for every 2 shares of Sprint FON theyowned.

Thus, they traded as two different stocks onthe New York Stock Exchange, but PCS wasowned by Sprint and only represented a divisionof its business.


19/22

Rationale for sell offs

Information

True value of subsidiary assets is obscured by the complexity of thebusiness structure in which they are embedded.

An oil industry analyst may undervalue an oil companys real estatebusiness because he or she does not follow those industries.

Spin offs and carve outs enhance the incentive to gather and analyze agreater amount of publicly available information through their creation ofnew publicly traded securities.

Managerial Efficiency

Inability of the managers to manage organization increases as the size anddiversity of assets under their control increases.

Top management may be unaware of the unique problems andopportunities of a subsidiary in a different line of business.

So motive of sell offs is to sharpen the corporate focus by divesting unitsthat are a poor fit with the remainder of the parent companys operations.


20/22

Tax Factors

Tax advantages can be achieved by the creation and spin off of subsidiariesinto natural resources royalty trusts or real estate investment trusts.

As long as these entities pay out 90% of their income to their shareholders, theypay no income tax.

Thus, the parent company can shelter income from taxes and benefit the spunoffsubsidiarys shareholders, who are the same as the parents shareholders.

Regulatory Factors

Spun-off entity might be under less regulatory constraints than the parentcompany.

AT & T may have decided to spin off its non-phone businesses becauseregulatory burden under which the phone business operated was constrainingits other businesses pursuits as well.

Some parent firms have spun off foreign subsidiaries so that they would notsubject to the laws and regulations of the home country of the parent.


21/22

Bondholder Expropriation

Some spin offs are motivated by the desire to transfer wealth frombondholders to stockholders.

In spin offs and split ups, spun off entities often take a share of the debtwith them.

Provide investors withpure winners

When some segments of a firm are losing money, the valuation multiple forthe overall company may be lowered.

Divestures help entities to differentiate between their profitable and non-profitable businesses.

Thus, pressure caused RJR Nabisco to separate its tobacco and foodbusinesses.


22/22

Corp Restructuring

Documents