Sponsored Spin-Off

The sponsored spin-off has drawn increasing attention from the private equity community as a tax-efficient technique to acquire a substantial interest in a division or subsidiary of a public company
For Sellers, the structure can deliver tax-free cash proceeds in excess of those available in a traditional spin-off or reverse Morris Trust transaction, while providing a "smart money" valuation benchmark for the newly public subsidiary
Sponsors can utilize the structure to acquire a large stake in a business at an attractive valuation and with full transaction leverage (constrained only by the limitiations of having a significant public investor base)
The end result of the structure is for the Sponsor to own up to 49.9% of the divested company with the remaining greater than 50% of the shares owned by the public shareholders of Seller
There are three principal variations on the structure insofar as it would be relevant to a non-core asset spin: (i) Sponsor invests pre-spin; (ii) Sponsor invests post-spin; and (iii) Sponsor invests as part of the spin, through debt/equity and/or equity/equity swaps
All three variations allow for the Seller to receive tax-free proceeds (through de-leveraging) up to the full leverage capacity of the spun entity and avoid any corporate tax on the sponsor equity proceeds
The sponsor equity proceeds will be either utilized to repay debt, pay dividends to shareholders, or repurchase Seller shares, depending on the particular facts and the structure chosen
All three structures should receive an IRS ruling confirming tax-free treatment
Transaction could also be structured as a Sponsored Split-Off, where the 51% to be received by Seller shareholders is distributed via an exchange ofefr where shareholders tender their ParentCo stock for SplitCo stock
In a "going private" version of the structure, the split-off could be done on a targeted basis to a discrete subset of ParentCo shareholders who seek to enter into a private JV with the financial sponsor
Precedent transactions: Marshall & Ilsley/Metavante, Alberto-Culver/Sally Beauty

Exhibit 6.6 – Benefits to Parties

Structural Benefits to Parent and Shareholders	Benefits to Target
Captures 100% of enterprise value at a premium valuation No tax leakage Substantial up-front proceeds - enhanced beyond typical upstream dividend Retains significant upside in Target for Parent shareholders Removes risk associated with one-step spin-offs Provides value benchmark without need for an IPO Mitigates significant downside from shareholder churn post-spin	Creates strategically and financially independent public entity Optimal access to capital Direct access to capital markets New acquisition currency "Dry powder" provided by Sponsor Benefits of Sponsor as investor Sets premium valuation as a floor Investors will react positively to Sponsor participation Stable, long-term shareholder under lockup Active and experienced board presence

Exhibit 6.7 – Other Considerations

Size of Financial Sponsor Interest	Can be up to 49.9%
Form of Financial Sponsor Interest	Can be structured as common, potentially convertible preferred, or combination Convert offers Sponsor downside protection and potential coupon, but raises incremental tax complexity
Governance	Sponsor will enter into governance arrangements with SplitCo As a large stockholder, Sponsor can have significant governance rights and influence, though tax requirements will provide some limitations Potential rights could include initial Board seats (up to 49.9% of inital Board should be permissible)
Management	Agreement as to inital management Subsequent management changes subject to approval of Board
Standstill	Sellers will want to require Sponsor to sign initial standstill Protect tax treatment Need to discuss ability of Sponsor to acquire additional shares without offer for entire company (relates to value paid) Sponsor may request poison pill or excess share provision to protect it during stanstill period
Ability to Increase Ownership	Ability for Sponsor to increase ownership will be related to standstill negotiation Sponsor cannot have a plan or intention to increase ownership to 50% or above Any increase could result in trigger of corporate level taxes under Section 355(e) Safe harbors would permit purchases by Sponsor to 50% or above after 1-2 years so long as there was no plan or intention

Exhibit 6.8 – Possible Transaction Structures

	Key Facts	Seller Proceeds	Sponsor Investment	Execution Complexity
Sponsor Invests Post-Spin	Sponsor invests in SpinCo representing up to 49% value, <= 20% vote Leverage placed in SpinCo through debt/debt swap or cash "boot" in reorganization	Debt and equity funded proceeds can be utilized to de-lever Seller, pay dividend, or repurchase shares	Convertible preferred representing up to 49% value, <= 20% vote SpinCo tax deconsolidated Potential to recap into "full vote" security post-spin, subject to IRS ruling	Simple to execute, although breaks some new ground from IRS perspective
Sponsor Invests Post-Spin	Sponsor invests in SpinCo immediately post-spin, up to 49% vote and value Leverage placed on SpinCo through debt/debt swap or post-spin leveraged dividend	Debt-funded proceeds can be used to de-lever Seller or pay dividend to shareholders Equity-funded proceeds distributed to shareholders	Common or convertible preferred	Simple to execute and consistent with prior IRS rulings
Sponsor Invests as Part of Spin	Sponsor invests through exchanging Seller debt and/or equity securities for up to 49% SpinCo vote and value Leverage placed on SpinCo through debt/debt swap	Debt-funded proceeds used to de-lever Seller Equity-funded proceeds used to buy-back Seller debt and/or equity	Common or convertible preferred	Meaningful execution complexity within likely IRS requirements, although doable

Transaction Structure - Sponsor Invests Pre-Spin

Step 1	Transaction Steps
	Seller contributes Sub to NewCo in exchange for 100% NewCo common stock and cash funded by leverage and sponsor equity Sponsor invests in NewCo convertible preferred representing less that or equal to 20% NewCo vote and greater than or equal to 20% NewCo value Can convert into >20% of NewCo vote, subject to IRS ruling Accomplishes tax deconsolidation
Step 2	Transaction Steps
	Seller distributes shares of NewCo to its shareholders Seller uses (i) cash up to NewCo basis to retire debt or pay dividend/repurchase shares and (ii) cash in excess of basis to pay dividend/repurchase shares

Transaction Structure - Sponsor Invests Post-Spin

Step 1	Transaction Steps
	Seller contributes Sub to NewCo and spins NewCo to its shareholders
Step 2	Transaction Steps
	Immediately post-spin, Sponsor invests for up to 49.9% of NewCo equity concurrent with NewCo being levered up to capacity Proceeds of debt and equity immediately distributed to Seller shareholders

Transaction Structure - Sponsor Invests Concurrent with Spin

Step 1	Transaction Steps
	Seller annouces plans to spin off Sub
Step 2	Transaction Steps
	Sub borrows money and distributes the proceeds tax-free to the Seller (up to the amount of the Seller's tax basis in the stock of Sub)
Step 3	Transaction Steps
	Seller contributes Sub to NewCo in exchange for (i) 100% of NewCo equity, and (ii) a NewCo Note with at least a 7-year maturity
Step 4	Transaction Steps
	Sponsor buys Seller debt and/or equity for cash Sponsor "debt-equity swap" limited to 20% SpinCo vote; top up through equity-equity swap Investment bank buys debt of Seller equal to the value of the NewCo Note
Step 5	Transaction Steps
	Seller spins off NewCo 49.9% NewCo equity to sponsor in retirement of the Seller debt and/or equity 50.1% to the public as a dividend NewCo Note to investment bank to retire the Seller debt
Step 6	Transaction Steps
	Investment bank sells NewCo Note to bond investors

Monetizing Spin-Off

Morris Trust