Chapter 15 – Alternative Restructuring Strategies

1. Chapter 15 –Alternative Restructuring Strategies

2. Divestitures • Sale of a portion of the firm to an outside party generally resulting in a cash infusion to the parent. Most common restructuring strategy. • Motives: • De-conglomeration / Increasing Corporate Focus • Moving away from the core business • Assets are worth more to the buyer than to the seller • Satisfying government requirements – anti trust • Correcting past mistakes • Assets have been interfering with profitable operation of other businesses

3. “Divestitures in Difficult Times”¹ • “Divestitures will increase, more complex.” • 215 execs – public (1/4), private (1/2), PE/VC (1/4) • Buyer’s Market – 60%; 30% buyers, credit crisis • Companies positioned to buy or sell or to buy • Most complex issue with divesture: • Separate business – 23% (Public company issue) • Carve out financials; recast historical #s – 21% • Find buyer – 25% (Private company complaint) • Negotiate contract – 10% • Execute deal in short time frame – 18% ¹ PricewaterhouseCoopers, Divestitures in Difficult Times: Survey of US Executives … Drivers and Challenges for 2010 and Beyond

4. “Divestitures in Difficult Times”¹ • How much longer to divest? • 20 % longer – 51% • More than 10%, less than 20% - 21% • More Buyer due diligence last 12 months? • 32% extensive additional information • 43% additional information • 25% same as prior years • Valuation expectation difference – 50% ?

5. Divestitures in Difficult Times”¹ • Audited financial statements important? • Critical to get deal done or max value – 27% • More important in current market – 49% • If buyer has financing requirements – 16% • Consider alternatives if no traditional deal? • Seller financing – 20% • Joint venture or other – 18% • Consider all options- 27%

6. Breaking Up Is Hard To Do • IT Integration makes divestiture difficult • Support services & facilities hard unravel • Outsourcing adds third party issues • Divested entity needs long term support • Disruption issue - seller & divested entity • May impact seller’s cost structure. Margin. • Regulators may force your hand DOJ/SEC ¹. Booz Allen, Chief Executive Magazine, 2009, Seven Reasons Divestitures Are Harder Than You Think

7. Deciding When to Sell: Financial Evaluation of Divestitures – With/WO • Estimate unit’s after-tax cash flows viewed on a standalone basis, carefully considering dependencies with other operating divisions • Determine appropriate discount rate • Calculate the unit’s PV to estimate market value • Calculate the equity value of the unit as part of the parent by deducting the market value of liabilities • Decide to sell or retain the division by comparing the market value of the division (step 3) minus its operating liabilities (step 4) with the after-tax proceeds from the sale of the division.

8. Spin-Offs¹ & Split-Ups • Spin-Offs: New legal subsidiary created by parent with new subsidiary shares distributed to parent shareholders on pro-rata basis (e.g., Medco by Merck in 2004) Spinoff Report - Berkshire • Shareholder base in new company is same as parent • Subsidiary becomes a publicly traded company • No cash infusion to parent • Tax-free to shareholders if properly structured • Split-Ups (e.g., AT&T in 1985): • A new class of stock is created for each of the parent’s subsidiaries • Current parent shareholders receive a dividend of each new class of stock, • Sometimes the remaining corporate shell is dissolved ¹ http://www.sec.gov/answers/spinoffs.htm and DIVISION OF CORPORATION FINANCE SECURITIES AND EXCHANGE COMMISSION Staff Legal Bulletin No. 4 (CF) ACTION: Publication of CF Staff Legal Bulletin DATE: September 16, 1997

9. Stage 1 Stage 2 Spin-Offs – Tax Free § IRC 355 Parent Firm Parent Firm Shareholders Parent Firm Parent Firm Shareholders Subsidiary Stock Paid to Shareholders As Dividend Or NOT Parent Shareholders Own Both Parent & Subsidiary Stock Subsidiary Independent of Former Parent Subsidiary

10. Examples 2013 and prior • http://www.spinoffresearch.com/ • Kimberly Clark – November 2013/2014 • KC - $42B – spin off health care business • $2 B sales, $200M profit – 8% sales/7%profit • Tax free § 355 – low teens EV/EBITDA $3-4B • Each KC share – has imbedded $9 HC value • Ingersoll Rand and Allegion – 2013/14 • Fortune • ConocoPhillips • Kraft • Marathon • ITT Corporation

11. Kraft Spin-Off¹ ² • Kraft purchased Cadbury 2010 - $19B • Kraft 2nd largest global food company/$20 • CEO Rosenfeld – bigger is better and “scale is a source of great competitive advantage” (2010) • 2011 – separate snacks & groceries. “Instill focus that will provide even greater opportunities” ¹Chon, Das, Ziobro, Activists Pressed for Kraft Spinoff, Wall Street Journal, August 5, 2011 2 http://www.prnewswire.com/news-releases/kraft-foods-announces-filing-of-form-10-registration-statement-for-planned-spin-off-of-north-american-grocery-company-145829965.html

12. Kraft Spin-Off (Mondolez/Kraft) • Broad based investor support for spinoff • A –Europe, develop mkts, NA snacks, conf • $32B – Oreo, Cadbury, Trident & Tang • B – NA groceries KRAFT • $16B – Kraft, Maxwell, Oscar Mayer, Jell-O • A – Faster growing in emerging markets • B – Less growth, strong margins, reliable sales and may pay dividends

13. Kraft Spin-Off • Issues: “different portfolios” • Reduce regulatory scrutiny – ConAgra Foods • Delivery – groceries/warehouse; snacks/shelve • Cadbury – originally seen as complementary & benefitting from “global scope, scale, technologies • Within few months – Cadbury split in works. • Current Developments¹ • Rosenfeld – Heads up A • Anthony Vernon – Heads up B • SEC filings – Q2 2012 See prior slide 13, April 2,2012 ¹ Jargon, Ziobro, Kraft Hashes Out Details of Split, Wall Street Journal, December 6, 2011

14. Kraft Spin-Off • Tougher Job ? Vernon • $17B business – ½ revenue and brands • Sales force less leverage • Prices & contract terms less negotiable? • Some products/brands need licensing? • Philadelphia Cream Cheese and Gevalia Coffee • Some products change silos – Planters to B • Emergence of Planter’s snacks • Tax free - IRS ruling May 2012

15. Kraft Spin-Off • Market reaction¹ • Results 1-2 years. Sell now? • More growth oriented and entrepreneurial? • Easier to value entities • Kraft paid $18.5B - $750M synergies 2013 but need to add $1.5B so price tag is really $20B • Value/synergies not happening. Split masks? • “Split produces two so-so businesses” • TEV – 9/7/11 - 10.5X EBITDA = Expensive • Other valuation - $29.50; price $34.08 • 12/8/11 - $36.33; Monday – pre deal $39.56, ↓ • 12/5/13 – Mondolez - $34; Kraft $ 53

16. GE Security & UTC¹ • August 2009 – JP Morgan hired to sell • Revenues - $1.8B, seeking $2B, Price $1.8B • UTC Fire & Security $6B revenues, security business shallow. 60% svc/install • Access business is strong but GE Casi competes. • Keep both? UTC product is better. • Neither have good video surveillance • UTC – increase service $; weak products • Security community does not see the value but a win for industry. 50/50 estimate of success. • April 2011- UTC² : deeply committed; expanded activities; $150M R&D, new test center, “very optimistic” ¹ http://ipvideomarket.info/report/ge_security_for_sale__anyone_interested; ² http://www.utcfireandsecurity.com

17. Equity Carve-outs • Two forms: Initial public offering (IPO) and subsidiary equity carve-out • IPOs represent the first offering of stock to the public of all or a portion of the equity of a formerly privately held firm (e.g., UPS sells 9% of its shares in 1999), Groupon 2011 and Dunkin Donuts • The cash may be retained by the parent or returned to shareholders • Subsidiary equity carve-out is a transaction in which the parent sells a portion of the stock of a wholly-owned subsidiary to the public. (e.g., Phillip Morris’ 2001 sale of 15% of its Kraft subsidiary) • The cash may be invested in the subsidiary, retained by the parent, or returned to the parent’s shareholders • Although the parent generally sells less than 20% of the sub’s equity, the sub’s shareholder base may be different than that of the parent

18. Split-Offs • A variation of a spin-off in which some parent company shareholders receive shares in a subsidiary in return for their parent shares. (e.g., AT&T spun-off its wireless operations in 2001 to its shareholders for their AT&T shares) • Frequently used when a parent owns a less than 100% investment stake1 in a subsidiary in order to: • Reduce pressure on the spun-off firm’s share price, because shareholders who exchange their stock are less likely to sell the new stock and • Increase the parent’s EPS by reducing the number of its shares outstanding 1Potential buyers generally prefer divested units in which they can purchase 100% of stock to avoid minority shareholders.

19. Voluntary Liquidations or Bust-Ups • Involves the sale of all of a firm’s individual operating units • After paying off any remaining outstanding liabilities, after-tax proceeds are returned to the parent’s shareholders and the corporate shell is dissolved • This option may be pursued if management views the growth prospects of the consolidated firm as limited

20. Going Private - BuyBacks • Multiple motivations - examples • 2010 survey¹ – 60 large deals worldwide • Examples • Burger King • Del Monte • Dynegy • J Crew • JoAnn Stores • Novell • Chrysalis PLC (Europe) • Fuji Foods (Asia) ¹ Weil, Gotshal & Manges Sponsor Backed Going Private Transaction – September 2011

21. Choosing Appropriate Restructuring Strategy: Viable Firms • Choice heavily influenced by the following: • Parent’s need for cash • Degree of operating unit’s synergy with parent • Potential selling price of operating unity • Implications: • Parent firms needing cash more likely to divest or engage in equity carve-outfor operations exhibiting high selling prices relative to their synergy value • Parent firms not needing cash more likely to spin-off units exhibiting low selling prices and synergy with parent • Parent firms with moderate cash needs likely to engage in equity carve-out when unit’s selling price is low relative to synergy

22. Things to Remember… • Divestitures, spin-offs, equity carve-outs, split-ups, split-offs, and tracking stock are common restructuring strategies to enhance shareholder value • Divestitures and equity carve-outs are more likely for operating units whose selling price is much higher than its perceived synergy with parent and whose parents need cash • Spin-offs are more likely for operating units whose selling price and synergy are low and whose parent firm does not need cash