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
	Company forms new subsidiary ("SplitCo") 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 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

Exhibit 6.16 – 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

Stock-for-Stock Monetization

Prepaid Lease