Spin off

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Spinoff

 

Definition 1

The process of splitting off certain parts of the company and found them as seperate independent businesses. The shares of the new company are given to the shareholders of the existing company (on a pro rata basis). The transfer of product knowledge and knowledge from the parent to the newly start up company is the most important aspect.

 

Definition 2

The event through which a new company is created and seperated from its parent company. After the event there are 2 seperate companies, each with their own outstanding share capital. Owners of the parent company's shares are being given an amount of shares in the spun off company according to a ratio (for example, each shareholder in parent company A will receive 5 shares in the spun off company B) Both company's shareholders and stakes are identical at the moment of the spin off even taking place. Each shareholder holds shares in company A as well as in B at the moment of the spinoff.

 

Reasons for a Spinoff

* The company has adopted a strategy to focus on its core activities. Non-core related activities are spun off

* The company thinks that the spun of activities can be better developed on their own, rather than as part of a bigger concern (usually the new company is a new technology or a new market)

* The company thinks that it can make more money by spinning the activities off. For example it could be that the spun off company yet needs to prove it can be profitable.

* Sometimes the activities don't fit in the overall branding strategy of the parent company.

* The spin off activities could be more profitable than the overall parent company

* Newly independent entities are no longer constrained by the overall culture of the parent company that might not fit

* The spun-off company can try to seize opportunities it would normally not be able to explore

* The management of the new company is often formed out of employees from the old company. For these employees, a spin off represents a good chance to make career progress.

* In a takeover, sometimes the acquirer does not want or can not for regulatory reasons, buy one of the target company's businesses.  A spin-off of that business to the target company's shareholders prior to the merger can provide a solution.

* Tax advantages (see more below)

 

Process of a Spinoff

1 Parent company to adopt a strategy to focus on its core business and to spin off certain parts of the business (often based on advise from management consultants, accountants, its own shareholders  and industry experts)

2 Parent company to decide which assets and which debt obligations should be transferred to the newly created company

3 Parent company to appoint a Paying Agent

4 Paying agent to publish a prospectus with the exact details of the event

5 Paying agent to announce the event to shareholders via the usual communication channels

6 Custodians and broker dealers to receive the new shares from the Paying Agent and to pass them on the the beneficial owners that are entitled to receive the new shares

7 Shareholders and parent company to deal with tax consequences and amend their investment portfolios and their share value

8 Shareholders to decide their trading strategies for both companies

 

Example of a Spinoff

A very famous and complex example of a spin off was that of a newly formed company called Reinet Investments SCA from its Parent Company Company Financière Richemont SA. Shareholders in Compagnie Financière Richemont SA voted at the AGM (9 October 2008) to spin off its Richemont luxury goods business as part of a planned restructuring of the firm. It also sold off its stake in British American Tobacco Plc and set up a separate investment unit called Reinet Investments SCA. Richemont owns a portfolio of leading international jewellery, watch, writing instrument and accessories brands including the Chloé fashion label. What made this spin off so complex was that the spin off was actually a cross-border corporate action event whereby the parent company is a Swiss listed company and the spun-off entity a Luxemburg listed entity.

 

Spin-offs and Tax

Tax laws differ per country and jurisdiction, but in many a spin-off distribution can be made tax-free to the parent corporation and the receiving shareholder. Rather than selling the division outright, a spinoff can represent significant savings to the parent company, especially if the subsidiary is carried on the books at a large discount to expected market value. A sale would generate a big capital gain tax. If at least 80% of a subsidiary’s equity is distributed to existing shareholders, a spin-off lets a company avoid the potentially large capital gains tax liability that a straight sale would incur. Spin-offs are the most tax efficient mechanism to separate a division. There are several rules and conditions to acquire tax free status though (depending on jurisdiction).

 

 

 

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