What is Spin-Off and Equity Carve-Out
A spin-off, or corporate spin-off, is a type of corporate restructuring in which a company separates some of its businesses or assets into a new legal entity. The separated business can either become a public company or a privately-owned company, depending on how the business is structured. A spin-off can also be referred to as a divestiture, demerger and/or a divestment.
An equity carve-out or partial initial public offering, is a similar type of corporate restructuring, however, it is a type of public offering where a parent company sells a minority stake in a subsidiary. Equity carve-outs provide an alternative to a full-fledged initial public offering, as the parent company can still retain control of the subsidiary.
How Does a Spin-Off Work
A company can choose to spin off a division or unit of the business to become a separate entity. The main reason companies choose to spin-off certain divisions is to unlock value for shareholders, as the spin-off can be structured more efficiently for tax purposes, or benefit from economies of scale.
The company typically divides the division into a newly established legal entity, which will become an independent company, as well as an IPO. Subsequently, the company will distribute shares in the new entity to its current shareholders. The spin-off process typically requires the approval of the company’s board of directors and shareholders.
How Does an Equity Carve-Out Work
An equity carve-out is a type of public offering where a parent company sells a minority stake in a subsidiary. This is typically done to raise capital, or to let ownership of a company be shared by more people in order to make it more liquid. Equity carve-outs allow investors to own a stake in a subsidiary without actually having to buy the entire company.
The process begins with the parent company stating its intention to do a partial IPO. The parent company then decides on the size of the offering and the number of shares it intends to release. Subsequently, the parent company must hire an underwriter, also known as an investment banker, who will typically help them price the offering and issue the securities.
The Advantages of Spin-Offs and Equity Carve-Outs
Spin-offs and equity carve-outs can provide a host of advantages. For the parent company, a spin-off or equity carve-out can provide the ability to unlock the value of a business, capital gain opportunities and increased liquidity for shareholders. It can also be used to gracefully exit a business that is no longer meeting the parent company’s objectives.
For the newly established legal entity resulting from a spin-off, the newly-formed company can enjoy improved capital access and be able to focus on its own strategic mission without the interference of its former parent company. The new company may also benefit from a reduced tax burden, as its assets have been appropriately distributed.
For shareholders, a spin-off or equity carve-out can provide increased diversification, increased returns, and the opportunity to become a part-owner of a business. Equity carve-outs can also provide the benefit of ownership without taking on the full risks of owning a business.
Conclusion
Spin-offs and equity carve-outs are two different forms of corporate restructuring that are used by companies to unlock the value of businesses or assets. Spin-offs involve the separation of a business or asset into a new legal entity that can become either public or private. Equity carve-outs involve the offering of minority stakes in a subsidiary to the public or private investors. Both spin-offs and equity carve-outs provide the parent company, the newly established legal entity, and shareholders with a variety of benefits.
