Replies to post #129103 on Biotech Values

[DewDiligence]

Re: Spinoff taxation

Thanks for pointing out the Barron’s article on topic; it’s an interview with a Robert Willens, a tax specialist. Here’s the relevant section:

http://online.barrons.com/article/SB50001424052748703927304576637241926449896.html

Barrons: Possible breakups or spinoffs, like those discussed for Yahoo! or HP's personal-computer unit, are in the news. What would the tax consequences be?

Willens: There's a rule, in place since 1997, that says that if a spinoff is part of a plan in which the distributing company or the spun-off company is acquired, the spinoff is taxable. But this is very easy to overcome. All you need to do is show that the acquisition was neither agreed to nor substantially negotiated in the two years prior to the spinoff.

So theoretically, X could spin off Y on Friday, and Y could be acquired on Monday, and it wouldn't be taxable because the acquisition was neither agreed to nor substantially negotiated. You'd be shocked by how many investors aren't aware of it. They think there's a two-year embargo on acquiring companies that participated in the spinoff. That's not the case.

Barron’s: What are the implications?

Willens: These companies are much more attractive acquisition targets. A great example is Ralcorp (RAH), which owns Post. ConAgra (CAG) wants to buy Ralcorp's private-label business, but not Post. Ralcorp announced the Post spinoff. Does that mean ConAgra can acquire Ralcorp almost immediately after the spinoff? The answer almost certainly is yes, because even though ConAgra has tried to engage Ralcorp in negotiations, Ralcorp has rejected them. They know that once the spinoff occurs, the acquisition of Ralcorp can occur almost immediately thereafter without jeopardizing the tax-free nature of the spinoff. Each business has a natural buyer—ConAgra for the private label and Kellogg (K) for Post. Shareholders would realize more if the two companies were sold to their natural buyers.