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 of
Sub B equity X % of sub B equity sold
Not sold To market for cash
In IPO

X % of
Company
B shares

Shareholders now own 100% of Company A (without B)

And (1-X)% of Company B implicitly
Through their company A 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 B
Shareholders
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 In this distribution is

subsidiary is sold in the made pro rata to the
public markets for cash shareholders of the parent
which is received by the firm as a dividend-a form
parent company of noncash payment to
the share holders.

Here the parent generally Here the parent firm no

sells only a minority longer has control over
interest in the subsidiary the subsidiary assets.
and maintains control
over subsidiary assets and
operations.
 Defining divestitures
• Selling assets, divisions, subsidiaries
to another corporation or
combination of corporations or
individuals
 Divestitures

Company A without Subsidiary B

Subsidiary B

Company C
 Divestitures (2)

Company A w/o subsidiary B

Cash, securities or assets as

consideration

Old Sub B

Company C
 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 FOOD
PHILLIP 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 for
U.S $12.9b.
 TOBACCO LITIGATION OF
PHILLP MORRIS
• 1954-78:125 CASES,MOSTLY
DISMISSED
• OUT OF WHICH 9 WENT FOR TRIAL
• MANY CASE DEFEATED
• 1995:RESTRUCTURED INTO HOLDING
COMPANY
 CONT…
1998:MASTER SETTLEMENT AGREEMENT
1. TOBACCO IND. SETTLED VARIOUS LAWSUIT
2.PAY U.S$ 205B IN NEXT 25 YEARS
3.PAY TOBACCO GROWER AS COMPENSATION FOR
LOSS OF DEMAND
4.YOUTH ADVERTISING WAS BANNED
1600 LAWSUITS OUTSTANDING AS OF2001
 CORPORATE STRATEGY
TOBACCO:
QUANTIFY LEGAL LIABILITY
COMPETE IN DEVELOPING MARKETS
FOOD:
Looking for growing segments
New products
International 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 MULTIPLE
2.TOBACCO LITIGATION DEPRESSING
KRAFT VALUES
 ALTERNATIVE TO CARVE
OUT
• SPINN-OFF
INFUSION OF CASH TO RETIRE DEBTS
• TRACKING STOCKS
BUT DOES NOT SHIELD KRAFT FROM
TOBACCO LITIGATION LIABILITIES
• DIVESTITURE
BUT 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