- 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 A – Benefits to Parties
Structural Benefits to Parent and Shareholders | Benefits to Target | |
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Exhibit B – Other Considerations
Size of Sponsor Interest |
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Form of Sponsor Interest |
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Governance |
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Management |
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Standstill |
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Ability to Increase Ownership |
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Exhibit C – Possible Transaction Structures
Key Facts | Seller Proceeds | Sponsor Investment | Execution Complexity | |
Sponsor Invests Post-Spin |
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Sponsor Invests Post-Spin |
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Sponsor Invests as Part of Spin |
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Transaction Structure – Sponsor Invests Pre-Spin
Step 1 | Transaction Steps |
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Step 2 | Transaction Steps |
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Transaction Structure – Sponsor Invests Post-Spin
Step 1 | Transaction Steps |
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Step 2 | Transaction Steps |
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Transaction Structure – Sponsor Invests Concurrent with Spin
Step 1 | Transaction Steps |
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Step 2 | Transaction Steps |
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Step 3 | Transaction Steps |
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Step 4 | Transaction Steps |
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Step 5 | Transaction Steps |
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Step 6 | Transaction Steps |
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