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