In the loop: Spin-off transactions - creating a new public entity

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In the loop 09/03/2014 by Assurance services
In the loop: Spin-off transactions - creating a new public entity

At a glance

Spin-offs represent a growing trend in recent years. Is there one in your future? Gain insight into the spin-off process including developing carve-out financial statements and creating a sustainable stand-alone entity.

What you need to know about spin-off listings

  • New public listings of spin-off entities represent a growing trend in recent years.
  • Spin-offs can be financially rewarding for investors, and improve the focus on non-core businesses.
  • Advance planning, skilled personnel, and project management are critical during the carve-out process.
  • The new entity will need to be prepared to operate as a public company on day one, requiring staffing, capitalization, and any necessary transitional services agreements.

Spin-off listings are increasing… is one in your future?

Spin-offs have seen a resurgence in recent years. Many executives are finding that spinning a business into a stand-alone public entity can be a complex, but necessary, move to capture shareholder value.

What may be causing this trend?

There are many potential reasons. Some say that spin-offs unlock value from non-core businesses by improving management focus or by simply increasing transparency to investors. From a macro standpoint, a spin-off may provide a higher return than other opportunities in the current low-yield environment. And from a parent perspective, a spin-off may be part of a larger strategic or capital structure change such as debt paydown. Regardless of the reasons, it seems spin-offs are at the forefront of current market activity.

Breaking up is hard to do

Preparing a business for a spin-off is a complex exercise. It is important to identify a project leader who is empowered to make critical decisions and navigate the organization through the process. The use of a project management group to prepare the separation plan, monitor progress, and identify gating issues can help keep the process on track. Early planning and identification of key resources is critical due to the multiple sets of financial information that may be needed, such as carve-out financial statements and proforma information.

Carving out the business

The carve-out financial statements need to reflect all of the “costs of doing business” on a stand-alone basis. However, some of these costs may not have been incurred by, or historically charged to, the carve-out entity. Companies often encounter system limitations because information was not originally captured for this purpose. Areas that can create challenges include:

  • Allocation of expenses: where specific identification is not practicable, a reasonable method of allocation must be used and disclosed.
  • Assets/liabilities: determining what gets attributed to the business and related impairment testing requires careful analysis.
  • Compensation/benefits: when personnel are transferred, stock-based compensation and pension obligations need to be considered.
  • Taxes: generally carve-out tax provisions are calculated on a separate return basis, which can be a significant and complex workstream.

Creating a sustainable stand-alone entity

Successful spin-offs require management to be forward-looking, addressing not only the day-one issues, but also focusing on creating an entity that can thrive as a stand-alone public company. Key aspects of this include managing the talent transfer and performing a gap assessment, establishing corporate governance, implementing necessary systems and controls, assessing the capital structure and cash flow plan, readying the finance function for SEC compliance and preparing for investor relations activities. These activities are focused on the specific processes, systems, and staffing required to operate the new business in its future state. Transition services agreements are a common vehicle to smooth separation, but they cannot replace thorough planning.

How PwC can help

To have a deeper discussion of how a spin-off divestiture might affect your company, please contact:

Beth Paul
973 236 7270
elizabeth.paul@us.pwc.com

Neil Dhar
646 471 3700
neil.dhar@us.pwc.com

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