On March 6, 2013, Time Warner Inc. issued a press release announcing plans to implement, courtesy of a spin-off transaction, a “complete legal and structural separation of Time Inc. from Time Warner.”
The proposed spin-off highlights an increasing trend among public companies in the face of tough market conditions – the transformation of what are usually large corporations not by building up their assets, but by efficiently siphoning them out. Time Warner would know, too – in the past decade, the company has used the vehicle of the spin-off to divest several of its major divisions, including the spin-off of AOL in 2009, and before that, Time Warner Cable, Warner Music Group and Time Warner Book Group. Last year alone, according to Dealogic, there were 85 spin-offs worldwide worth a total of $109 billion.
Generally speaking, a spin-off occurs when a division of a company is separated into an independent business. It is a form of reorganization in which the parent company (the “Parent”) establishes a new entity (“Spinco”) and distributes shares in Spinco to the shareholders of the Parent on a pro rata basis. In the end, the Parent will have divested itself of Spinco, and the shareholders of the Parent will have retained their respective interests in both the Parent and Spinco.
Boards of directors of Canadian corporations that are interested in pursuing this method of unlocking shareholder value want to know why they should use it, how they should implement it, and what the attendant risks are. In our first of two posts on corporate spin-offs, we answer the first question.
Why Should I Use It?
Allows Parent to Focus on “Core” Business, Improving Corporate Accountability and Efficiency. First and foremost, spin-offs improve management focus by allowing a company to optimize its business lines. A division that is not needed to support the core business and that is not big enough to be competitive in its own sector takes up valuable management time and financial resources.
“Liberates” the Market Value of Spinco and Enables Spinco to Access Capital Markets Directly. The separation of non-core assets into Spinco has the secondary effect of improving the identification and valuation of Spinco’s assets by the market. The market generally likes businesses that are focused in their space and have a management team devoted to growing only that business. In Canada, the forestry, mining and mineral resource sectors have used spin-off transactions for this purpose. There are now examples of retail companies doing the same with their real estate assets. Spun out divisions have the ability to access capital markets directly, allowing Spinco to raise more money than would be the case as a division within another company.
Separates Parent or Spinco from Regulatory Regimes. A spin-off may enable the Parent or Spinco to avoid the compliance costs associated with a regulatory regime that is specific to either the Parent or Spinco. This may allow the Parent or Spinco to escape certain regulatory limits on business activity.