Equity Carve-Out

equity carve-out

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.

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Equity Carve-Out

The act or process of a company making an IPO on one of its subsidiaries without fully spinning it off. During an equity carve-out, the parent company becomes majority shareholder and only offers a minority share to the market. This gives the subsidiary a degree of autonomy (such as its own board of directors), while still allowing it to retain access to resources at the parent company. Most of the time, an equity carve-out ultimately results in the parent company fully spinning off the subsidiary. It is also called a partial spinoff or simply a carve-out.