A spin-off transaction is a type of corporate action where a new, independent company (“SpinCo”) is formed through the separation of a segment or subsidiary from the parent company (“RemainCo”). Previously, these businesses were housed under the same corporate umbrella, but post-spin-off they will be two (or more) separate, public companies. While this principle is consistent across all different types of spin-offs, there could be different ownership, timing, and capital raising implications depending on how the transaction is structured. In this article, we dissect the three main types of spin-off transactions: traditional spin-off, carve-out, and split-off.
In a traditional spin-off, the parent company distributes shares of the SpinCo to parent company shareholders on a pro-rata basis. This means that the parent company shareholders will have the same proportionate interest in each the parent company and the SpinCo before and after the spin-off closes.
The parent company receives no additional capital from outside investors in this type of spin-off. However, the parent company could structure the spin-off in such a way where the SpinCo pays a one-time cash distribution to the Parent Company. There are numerous reasons why they could decide to structure it this way, but one common reason is to maintain constant leverage ratios at the parent company pre and post-spin-off.
An example of a traditional spin-off transaction is Ingersoll Rand separating off their commercial and residential security businesses into a new, publicly traded company called Allegion in 2013. You can learn more about this transaction here.
In a carve-out transaction, the Parent and SpinCo are still eventually separated, but the mechanics, timing, and ownership structure differ from a traditional spin-off. In most carve-out transactions, the Parent company sells a portion of the shares of the subsidiary (CarveCo) upfront through an Initial Public Offering (“IPO”). They typically sell a minority stake in the CarveCo but could IPO the entire company in some situations. Therefore, unlike in a traditional spin-off, the parent company shareholders do not receive a pro rata distribution of ownership in the subsidiary. Instead, the shareholders are compensated through the parent company receiving cash proceeds from selling a portion of the subsidiary through the IPO.
When the Parent company sells a minority stake in the CarveCo (usually less than 20% due to tax purposes), they can distribute the remaining ownership in the subsidiary at a later date. The distribution can be executed in a few different ways but is commonly structured as a pro rata distribution of the Parent company’s ownership stake to their shareholders. The other way to distribute ownership is through an exchange offer where parent company shareholders can choose to exchange their shares for shares in the CarveCo. Therefore, the ultimate ownership structure of the subsidiary (“CarveCo”) is a blend of RemainCo shareholders and new public shareholders from the IPO.
An example of this type of transaction is Fiat Chrysler Automobiles N.V. (“FCA”) carve-out and distribution of Ferrari. They sold 10% of Ferrari through an IPO in 2015 and then subsequently distributed their remaining ownership to FCA shareholders a few months later. You can read more about this transaction here.
In a split-off transaction, the Parent company either IPOs the entire subsidiary to separate it from the parent or gives shareholders the choice of owning the parent or the subsidiary. In the latter case, the mechanism used is an exchange offer. This is a transaction where shareholders can decline to participate and continue holding shares in the parent or participate and exchange some or all their shares in the parent for shares in the subsidiary. Additionally, exchange-offers can be used as a means to distribute ownership in a carve-out after the parent IPOs a portion of the subsidiary and the market has already placed a market value on the CarveCo.
An example of this type of transaction is Proctor & Gamble’s split-off of the Specialty Beauty Brands business (which then merged with Coty Inc.) in 2016. You can read about this transaction here.