I did a little looking about what type of spin off LTC would
be and is not based upon the value of the stock.
This would qualify as a tax free spin off under Section 355 of the Internal Revenue Code
This would not be a sale or LBO spin off but an equity carve out spin off with an IPO in which at least 80% of the stock has to be distributed for a valid business purpose in which the subsidiary has to be in business for at least 5 years.
The company has to provide 3 years auited financials
to get a tax free status so the parent does not have to pay tax on the sale of the shares when distributed and submit
all this info for an IRS ruling,SEC RULING AND ETC and must
pass conrol or "cintinuity of interst"to the parents shareholders.
The compnay can use the purpose of the spin off is to acheive a higher stock price as a busienss purpose for IRS purposes.
Studies from Penn State over 25 years have shown that spin offs outperform the market . Spinoffs outperormed their industry peers and S&P by about 10% per year in the first three years of independence.
In their study the parent companies also managed to do fairly well outperforming their peers in their industry group
by more than 6% annually for the 3 year period.
In another study spin-offs outperformed the market with a
2 year total return of 27% compared to the S&P and Russell 2000.
The decision to buy in the corporate parent maybe desirable if it alllows the investor to purchase both entities at a lower combined price than the two separate entities post-spin companies.
This is diificult without definitive knowledge of the
soin-offs balance sheet asset base and monetized earnings power.
Typically the market reacts positively to announcements of spin-offs.
Studies have demonstrated that the annoucement of a spin-off or carve-out is associated with positive price movements in the price movements of the parents stock.
This will be interpreted as unlocking or enhancing the value of the parent compnys stock The stock will settle in a narrow trading range.
This can take as long as a year,depending upon IRS,SEC,and final Board approval.
This is the time to be involved with a spin off because if one is patient and believes both parts are attractive investments.
Spin-off pricing inefficency ,where it can be accuratley identified holds the potential for above average returns
over time
Regards,
bbhuey
