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Choosing how to break up can be trickier than the act of breaking up itself. Just look at Pfizer, which is shedding animal health to focus on pharmaceuticals. On Wednesday, Pfizer announced that it will “split off” its 80 per cent ownership in Zoetis, its animal business. Some observers conflated this split with a spin-off, but there is a distinction, one which matters to Pfizer and its shareholders.
The difference between a split-off and a spin-off is akin to the difference between dividends and share repurchases. In a spin-off, a company distributes shares in a subsidiary to all shareholders. In a split-off, shareholders decide whether to hold shares in the parent or in the subsidiary. If they prefer the subsidiary, they tender their shares in the parent. The parent exchanges these for shares in the subsidiary. In the case of Pfizer, its shareholders can exchange $100 worth of Pfizer stock for $108 of Zoetis stock (the unequal values nudge shareholders to tender their Pfizer shares).
What makes the split transaction tricky is valuing the subsidiary. Imagine a subsidiary that is not publicly traded. Shareholders then assume tremendous risk in exchanging for shares that lack an established market value until after the transaction. Smartly, Pfizer sold a fifth of Zoetis in a January IPO, establishing a market value for it. Since 2001, there have been only 11 split-offs but 336 spin-offs, according to Dealogic. The valuation puzzle is a big reason why.
The key benefit of a split-off to shareholders is that they can select which company’s shares they wish to hold. With shares in the correct hands volatility should diminish. The company benefits from slicing its share count without spending cash to buy back shares. Both Pfizer and Zoetis traded up 2 per cent on the news. Shareholders see that the advantages outweigh the complexity.
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