Definition of equity carve-out

In an equity carve-out, a company lists a part or division of their business on the stock market in an initial public offering (IPO). This technique is part of the spectrum of techniques employed in mergers & acquisitions.

In most cases, companies keep majority control (more than 50 per cent) over that business division althouth they may opt to reduce the stake later. The company might also opt to distribute shares in the new entity to its existing shareholders instead of selling them on the stock market to new investors.

The reason why companies use equity carve-outs is to increase the value of their business. In many cases, the division might offer low synergies with the actual core business. This can mean that investors rate that business as part of the larger group at a lower valuation than it might otherwise achieve as it is subject to a conglomerate discount. If the conglomerate owner can get this entity listed separately, the business can act more independently and focus on growing the business with fewer constraints. It should then achieve a higher valuation and might be perceived as a takeover target as well.

This technique is frequently used by governments in privatisations. Especially in large privatisations where there are no obvious acquirers. In this case the equity carve out is perceived as the "via regia", a route to a more ideal status quo.

These privatisations dominate the ranking of the largest equity carve-outs by transaction value by far. The top 3 include EnteNazionale per l’Energia by the Italian government at €17.8bn in 1999, NTT by the Japanese government at Y1.5tn in 1999 and Deutsche Telekom by the German government at DM20.3bn in 1992.

Among the biggest equity carve-outs by non-government owned companies are a 50 per cent stake in Agfa-Gevaert NV by Bayer AG valued at €1.5bn in 1998 or the sale of 35 per cent stake in Snam Rete Gas SpA by ENI SpA valued at €1.9bn in 2001.

 

Equity carve-outs in the news

More recent examples of discussions of equity carve-outs include the news in June 2012 of Pfizer’s decision to spin off its animal health business.

Companies, however, should first have a thorough review and get their strategy right before using equity carve-outs. For example, Swiss pharmaceutical company Roche acquired Genentech then later listed part of it in an equity carve-out only to buy these shares again in a tender offer after a couple of years.[1]

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