equity carve-out - Business Definition
The American Heritage® Dictionary of Business Terms Copyright © 2010 by Houghton Mifflin Harcourt Publishing Company. Published by Houghton Mifflin Harcourt Publishing Company. All rights reserved.
The initial sale of common stock by a corporation of one of its business units. The initial public offering generally involves less than the entire amount of the stock in the unit, so the parent company retains an equity stake in the subsidiary. An equity carve-out is sometimes followed by a distribution of the remaining shares to the parent's stockholders. Also called carve-out, splitoff IPO.Case Study Equity carve-outs—initial public offerings of subsidiaries—are not unusual. The Limited, Inc. carved out 18% of Abercrombie & Fitch Co. in a 1996 IPO. Two years later DuPont raised $4.4 billion by undertaking an equity carve-out equal to 30% of its oil subsidiary Conoco. Later the same year, CBS raised $3 billion in a carve-out of 16% of subsidiary Infinity Broadcasting. In August 1998 Cincinnati Bell sold 15 million shares in an initial public offering of subsidiary Convergys. Later that year Cincinnati Bell distributed to its shareholders the remaining 137 million Convergys shares. Equity carve-outs can offer several advantages to a company and its shareholders. In general, management of the parent firm believes the market value of the separated companies will be greater than the market value of the combined firm prior to the carve-out. Perhaps the investment community has been overlooking the real value of the subsidiary that produces good financial results but is overshadowed by the other parts of the firm. Another plus derives from a separately traded stock allowing the former subsidiary to use its own stock as a currency for acquisitions and management incentives. The new publicly traded company will have access to the equity markets that can provide capital for expansion.
equity carve-out - Investment & Finance Definition
The initial sale of common stock by a corporation of one of its business units. The initial public offering generally involves less than the entire amount of the stock in the unit so the parent company retains an equity stake in the subsidiary. An equity carve-out is sometimes followed by a distribution of the remaining shares to the parent's stockholders. Also called carve-out, split-off IPO.Case Study Phillip Morris's 2001 equity carve-out of a portion of its ownership in subsidiary Kraft Foods resulted in what to that time was the second largest initial public offering in U.S. history. The $8.7 billion raised from the issue of 280 million shares was second only to the prior year's $10.6 billion initial public offering of AT&T Wireless tracking stock by AT&T. Demand for the Kraft issue was strong enough to allow the managers, Credit Suisse First Boston and Salomon Smith Barney, to increase the issue price to $31 per share from an earlier estimate of $27 to $30. Kraft, owner of well-known products including Maxwell House coffee, Post cereals, and Planters peanuts, was wholly owned by Phillip Morris prior to the IPO. Subsequent to the carve-out, Phillip Morris held slightly less than 50% of Kraft's class A common stock but controlled nearly all of the firm's voting shares. Proceeds from the stock issue were to be used to reduce Kraft's immense debt, which was incurred when the company in late 2000 purchased Nabisco Holdings for nearly $20 billion.