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Supercharged IPO

Transaction Structure

Step 1 Description
supercharged IPO
  • Seller owns subsidiary which it seeks to montetize through "supercharged IPO"
Step 2 Description
supercharged IPO
  • Seller contributes subsidiary to NewCo and enters into "binding committment" with underwriters to sell > 20% of NewCo common equity in a marketed public offering
  • Seller commits to reduce its NewCo position to < 50% within a 2-year period and ultimately fully exits NewCo
  • NewCo and Seller enter into tax-sharing arrangements whereby NewCo makes annual cash payments to Seller equal to 80-90% of cash tax savings of Section 338 step-up

* Seller must also receive a small amount of cash from NewCo to ensure tax step-up

Advantages Disadvantages
  • Seller recoups substantial portion of tax cost of asset sale through annual tax-sharing payments made by NewCo
  • NewCo obtains 100% tax step-up
  • Tax-sharing obligation may not impair NewCo's IPO valuation and does not affect EPS (booked as a liability at closing)
  • Seller monetizes 100% of value if Subsidiary through periodic secondary sell-down
  • Seller triggers 100% of tax gain immediately, notwithstanding that it may have only sold a smaller percentage of NewCo in the IPO
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