Companies are increasingly going the spin-off route to boost shareholder value. A spin-off of a division of a business is a difficult process for a CFO to handle -- and by default a major challenge for the company’s treasury operation.
Still, a spin-off can be a boon to shareholders, as evidenced by several cases this year, the Wall Street Journal noted. According to Victoria Harker, CFO of Tegna Inc., which was spun off from Gannet Co., such spinoffs make sense when businesses become “basically bar-belled” with big differences in cash flow, revenue and bottom-line growth projections, and debt-rating goals.
Take the case of the split of Kraft Foods from Mondele International Inc. Since the spin off, Kraft’s stock has risen steadily, increasing by roughly half. When the takeover offer from Heinz came through, the stock doubled still. Shareholders wound up owning almost half of what became Kraft Heinz Co. earlier this month.
What is treasury’s role?
Focus on the fundamentals. “Divestiture is harder than a merger or an acquisition,” said Brad Larson, a treasury consultant and former practitioner. “There’s not as much control over it. It’s like driving a racecar around a track while trying to build the car.”
Prashant Tekriwal, senior manager at Deloitte’s treasury practice, advised treasurers to focus on fundamentals when preparing for divestiture. “Legal entity structure and operating model design are the foundational elements when starting separation planning across the functions including finance, HR and IT,” he said.
Have input early in the process. In divestitures, said Larson, the NewCo often ends up with its own credit line, “and if lawyers handle that, you end up with boiler plate language and a bank that writes treasury terms in its favor,” he said. “There are often a lot of documents that refer to reporting that you have to live with.”
Changing contractual terms is very difficult and expensive, so it’s better for treasury to have input early in the process. In one situation, Larson had two-and-a-half weeks to build a treasury group from scratch for the divested organization, with new bank accounts. “I had to learn really fast,” he said.
Get started early. A lot of the same rules of M&A apply but many of the activities have to start even earlier, according to Eric Cohen, a principal at PricewaterhouseCoopers’ advisory practice. “There are specific nuances depending if the company is spun off as a new standalone entity or sold to another organization with an existing treasury operation,” he said.
For standalone companies, there’s often a period where the parent continues to provide treasury support on a service level agreement basis (Transition Services Agreement – TSA) post-close until the new company can set up its own infrastructure. This is common in situations in which separating a component of the treasury environment will take longer than the anticipated close date or will be too complex to unwind (e.g., IT infrastructure).
In terms of banking, there may be situations in which there are a lot of comingled accounts (i.e., accounts containing activity from both parent and NewCo) or new accounts that need to be opened to support new legal entities. “We have seen situations in which it may take up to a year in advance of transaction close to fully separate the divested business,” Cohen said.
Design a global bank account. Immediately thereafter, the attention shifts to treasury for global bank account design and account numbers needed to obtain business licenses, and configure payroll, payments and collections systems across all the countries in scope. “Sometimes there isn’t enough focus on treasury planning upfront, which invariably leads to surprises later in the separation implementation timeline, missed deadlines and risk to target Day 1,” said Tekriwal.
Understand the cash flows. In a divestiture, one of the toughest things to do is really understand what has happened with cash in the past because it’s often intermingled with the parent company’s cash. Some money could have gone directly to the parent. Some expenses could have been paid by the parent. When the company strikes on its own, it needs to know what cash is coming in and out. “It could be literally hundreds of transactions, both cash and non-cash, rolled up into one G/L transaction,” Tekriwal said.
The challenge for treasury is to build a cash forecast. Tekriwal recommends building a template and continuously improving it and filling it out as the information becomes clearer. “As least you have something… even if it’s not perfect,” he said. Sometimes it’s easier to set up separate accounts at the same bank as the parent’s to make sure you can operate on your own come separation.