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

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 announces 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