12: Raising Long-Term Financing12-3g SPECIALISED INITIAL PUBLIC OFFERINGS: ECOs, SPIN-
OFFs, REVERSE LBOs AND TRACKING STOCKS
The four special types of IPOs are equity carve-outs (ECOs), spin-offs, reverse LBOs and tracking
stocks.
An equity carve-out (ECO) occurs when a parent company sells shares of a subsidiary corporation to the
public through an initial public offering. The parent company may sell some of the subsidiary shares it
already owns, or the subsidiary may issue new shares. In either event, the parent company almost always
retains a controlling stake in the newly public company.
A spin-off occurs when a public parent company spins off a subsidiary to the parent’s shareholders by
distributing shares on a pro rata basis. Thus, after the spin-off, there will be two public companies rather
than one. Conceptually, the total share price of the parent should drop by approximately the amount that
the market values the shares of the newly public spin-off. Researchers document significantly positive
price reactions for the shares of divesting parent companies at the time of spin-off announcements,
perhaps indicating that the market expects the two independent companies will be managed more
effectively than they would have been had they remained together. A recent Australian example was the
Shopping Centres Australasia Property Group, which was spun off from Woolworths Ltd in November
2012 and raised $472 million in new capital.^7
In a reverse LBO (or second IPO), a formerly public company that had previously gone private through
a leveraged buyout goes public again. Reverse LBOs are easier to price than traditional IPOs, because
information exists about how the market valued the company when it was publicly traded. Empirical
research indicates the private equity partners earn very high returns on these transactions. One reason
for this is obvious: only the most successful LBOs can subsequently go public again. These are discussed
further in Chapter 21, section 21-4b.
Just Jeans provides an example of a reverse LBO. It was the first major listed Australian company to
undergo a transition from public to private ownership. This occurred through a $108 million management
buyout in 2001, led by British-based private investment group Catalyst Investment Managers. In 2004,
the group was renamed the Just Group and re-listed on the ASX. In 2008, it was taken over by Premier
Investments and de-listed.
The final type of specialised equity offering, tracking stocks, is a recent innovation that may well have
already run its course. These are equity claims based on (and designed to mirror, or track) the earnings of
wholly owned subsidiaries of diversified firms. They are hybrid securities, because the tracking stock firm
is not separated from the parent company in any way, instead remaining integrated with the parent both
legally and operationally. In contrast, both carve-outs and spin-offs result in legally separate firms. AT&T
conducted the largest common stock offering in US history when it issued US$10.6 billion in AT&T
Wireless tracking stock in April 2000. AT&T’s stock rose significantly when it announced the wireless
offering. Unfortunately, both parent and tracking stock performed horribly during the months after the
issue, and in July 2001, AT&T Wireless became an independent company; it was acquired by Cingular
Wireless in October 2004.
7 ‘Woolworths spin-off SCAR Property Group rises on ASX debut. The Australian, 27 November 2012. http://www.theaustralian.com.au/business/
markets/woolworths-spin-off-sca-property-group-rises-on-asx-debut/story-e6frg916-1226524504109.
equity carve-out (ECO)
Occurs when a parent
company sells shares of a
subsidiary corporation to the
public through an initial public
offering
spin-off
A parent company creates a
new company with its own
shares to form a division
or subsidiary, and existing
shareholders receive a pro
rata distribution of shares in
the new companyreverse LBO (or second
IPO)
A formerly public company
that has previously gone
private through a leveraged
buyout and then goes public
again. Also called a second
IPOtracking stocks
Equity claims based on (and
designed to mirror, or track)
the earnings of wholly owned
subsidiaries of diversified
firms