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Cash-Rich Split-Off

Overview

  • A cash-rich split-off is an M&A technique whereby the Seller exchanges stock of the Company for stock of a "cash-rich" subsidiary of the Company ("SplitCo") on a tax-free basis
  • Benefits of cash-rich split-off for Company:
    • Opportunity to tax-efficiently dispose of a non-core asset
    • Opportunity to repurchase shares at attractive price
    • Company should seek to negotiate a share of Seller's tax savings through a discount in the valuation of the shares repurchased
  • Benefits of cash-rich split-off for Seller:
    • Tax-free disposition of Company's low tax basis stock by Seller, substantially for cash
    • Seller can negotiate with Company to contribute operating assets which Seller seeks to acquire
    • Alternative use: can also be used to unwind a stock-for-stock monetization structure on a permaently tax-free basis (e.g. Time Warner Cable/Comcast)
  • Structural requirements:
    • Active trade or business
      • SplitCo must contain an "active trade or business" of Company under IRC Section 355 (i.e. an operating business that the Company has owned and operated for 5 years or more
      • Active trade or business should comprise at least 5-10% of SplitCo's enterprise value
    • Cash limitation:
      • SplitCo must not contain greater than or equal to 66% cash or cash equivalents
    • Eligible non-core assets:
      • In addition to the 5-year Company assets, other assets eligible to "fill up" the non-cash bucket of SplitCo could include licenses, equipment, 20% or greater equity interests in corps, significant equity interests in partnerships, and other non-cash equivalents
    • Business purpose:
      • Split-off must accomplish a significant non-tax business purpose for the Company; precedents included eliminating overhang on stock, improving regulatory position, minimizing commercial conflicts, and others
  • Precedent transactions: Liberty Media/News Corp, Comcast/Time Warner Cable, Henkel/Clorox, Comcast/Liberty, KeySpan/Houston Exploration, Janus/DST Holdings, Liberty Media/CBS, Liberty Media/Time Warner, Cox Communnications/Discovery Communications

Transaction Structure

Transaction Transaction Steps
cash-rich split-off
  1. Company forms new subsidiary ("SplitCo")
  2. Company transfers operating business, non-cash assets, and cash into SplitCo
    • Operating business must qualify as an active trade or business
    • Up to ~66% of SplitCo may be cash or cash equivalents
  3. Company splits off SplitCo to Buyer in exchange for the Company shares owned by the Buyer
    • SplitCo becomes a wholly owned subsidiary of Buyer
    • Exchange of 100% of stock of SplitCo for Company shares qualifies as a tax-free distribution (split-off) under IRC Section 355
    • Transaction is tax-free to both Company and Buyer

Note: Buyer will need to own and operate SplitCo for at least 2 years post-transaction. There is still, however, potential to presently monetize value through securitization, for example.

Post-Transaction  
cash-rich split-off  

Exhibit – Advantages & Disadvantages

Advantages   Disadvantages
  • Fully and permanently tax-free monetization of business for cash
  • Seller can negotiate with Company to contribute operating assets that Seller wants to obtain
  • Complex to execute
  • Company will need to accomodate transaction
  • Potential value leakage to Seller on 34% active business
  • Seller must own and operate acquired business for 2 years post-transaction
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