equity carve out

Equity carve outs

• Also called partial IPO• Parent company sells a percentage of the

equity of a subsidiary to the public stock market

• Receives cash for the percentage sold• Can sell any percentage, often just less than

20%, just less than 50%, are chosen.

Equity carve out (partial IPO)

Company A without subsidieary B

Subsidiary B

Shareholders implicitly own 100% of equity of subsidiary B through their Company A shares.

Equity carve out (partial IPO)

Company A without subsidieary B

Portion ofSub B equity

Not soldX % of sub B equity sold

To market for cashIn IPO

Shareholders now own 100% of Company A (without B)And (1-X)% of Company B implicitly

Through their company A shares

X % ofCompanyB shares

Spin offs

• Typically parent corporation distributes on pro rata basis, all the shares it owns in subsidiary to its own shareholders.

• No money generally changes hands• Non taxable event

– as long as it jumps through substantial hoops

A Spin-off

• In spin-off a company is distributing the subsidiary shares that it owns as a dividend to its shareholders who will, then, own shares in the subsidiary rather than through parent company.

Spin offs

Company A without Subsidiary B

Subsidiary B

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.

Spin offs (2)

Company A after spinoff

New company BShareholders receive Shares of company B

Old shareholders still own shares of company A, which now only represent ownership of A without B.

Equity Carve-out Spin-off

In this the stock of the subsidiary is sold in the public

markets for cash which is received by the parent

company

In this distribution is made pro rata to the shareholders of the

parent firm as a dividend-a form of noncash payment to

the share holders.

Here the parent generally sells only a minority interest in the

subsidiary and maintains control over subsidiary assets

and operations.

Here the parent firm no longer has control over the subsidiary

assets.

Defining divestitures

• Selling assets, divisions, subsidiaries to another corporation or combination of corporations or individuals

Divestitures

Subsidiary B

Company A without Subsidiary B

Company C

Divestitures (2)

Company A w/o subsidiary B

Old Sub B

Company C

Cash, securities or assets as consideration

Features of divestitures

• Selling corporation typically receives consideration for the assets sold– cash – securities– other assets

• Divestitures are typically taxable events for selling corporation (new basis for purchaser)

• Comparison to divestitures– Similar in that cash is received– Differences

• Divestiture is usually to another company• Control over assets sold is relinquished by parent-

seller and trading of subsidiary is not initiated

Advantages of Equity Carve-out

• boost a company's valuation• provide powerful incentives to the people

who work in the unit• help management of the parent focus on core

operations• better information about the business unit• Opportunity for financing the growth of the

subsidiaries

Cont….

• It brings new capital to the parent company.

• It creates a public market for the subsidiary’s stock and hence provides public scrutiny, i.e. the subsidiary is answerable to the investors.

• It attracts new investors.

CASE STUDY

PHILLIP MORRES AND KRAFT FOODS

KRAFT FOODPHILLIP MORRES

HISTORY

• PHILIP MORRIS-TOBACCO SHOP IN 1847 IN LONDON

• COMPANY STARTED IN 1902• MARLBORO BRAND CIGARETTES• MARLBORO BECAME NO. 1 SELLER IN 1972

HISTORY OF KRAFT FOODS

•Started in1903 by James Kraft by door to•Door cheese selling•1914-cheese factory•1924- changed to Kraft cheese co.•1945-changed to Kraft food Co. as product was diversified.•1988-Phillip Morris purchased Kraft forU.S $12.9b.

TOBACCO LITIGATION OF PHILLP MORRIS

• 1954-78:125 CASES,MOSTLY DISMISSED• OUT OF WHICH 9 WENT FOR TRIAL• MANY CASE DEFEATED• 1995:RESTRUCTURED INTO HOLDING

COMPANY

CONT…

1998:MASTER SETTLEMENT AGREEMENT1. TOBACCO IND. SETTLED VARIOUS LAWSUIT2.PAY U.S$ 205B IN NEXT 25 YEARS3.PAY TOBACCO GROWER AS COMPENSATION

FOR LOSS OF DEMAND4.YOUTH ADVERTISING WAS BANNED 1600 LAWSUITS OUTSTANDING AS OF2001

CORPORATE STRATEGY

TOBACCO: QUANTIFY LEGAL LIABILITYCOMPETE IN DEVELOPING MARKETSFOOD:Looking for growing segmentsNew productsInternational sales

ECO:KRAFT DEAL

• JUNE 13 2001• PHILIP MORRIS OFFERED 16.8%OR 280m SHARES OF KRAFT FOODS.• OFFER PRICE:U.S$ 31• PHILIP MORRIS MAINTAINS > 95% OF VOTING

RIGHTS

Why Restructure?

• TO SEPARATE FOOD AND TOBACCO BUSSINESS

• TOBACCO DRGGING DOWN VALUATION OF FOOD BUSSINESS

1.FOOD HAS HIGHER PE MULTIPLE2.TOBACCO LITIGATION DEPRESSING KRAFT

VALUES

ALTERNATIVE TO CARVE OUT

• SPINN-OFFINFUSION OF CASH TO RETIRE DEBTS• TRACKING STOCKSBUT DOES NOT SHIELD KRAFT FROM TOBACCO

LITIGATION LIABILITIES• DIVESTITUREBUT LOOSE OUT ON A GROWING BUSSINESS

REASONS FOR CARVE OUT

• RETIRE DEBT• SHIELD KRAFT FROM PHILIP MORRIS

LITIGATION LIABILITIES PHILIP MORRIS STILL CONTROL >95% OF

VOTING RIGHTS• SHAKE OFF KRAFT ASSOCIATION WITH

TOBACCO• UNDERVALUATION

UNDERVALUATION

SHARE PRICE PERFORMENCE

MARKET REACTION

PERFORMANCE AFTER CARVE OUT