Procter & Gamble (PG), a favorite holding of BetterInvesting clubs, on Sept. 1 began a split-off offer related to the separation of its specialty beauty brands. This transaction type is often confused with a spinoff. Although split-offs are less common than spinoffs, the frequency of this transaction is increasing. Spinoffs and split-offs have some common features and important differences.
The first common feature is the addition of a new security to the portfolio of participating shareholders. In this instance the parent company wishes to divest one of its business lines and use the transaction to transfer ownership to its own stockholders.
Depending on how the divestment is structured, the transfer can be a taxable or nontaxable event. A portion of each cost basis in the parent company is transferred to the new company. The beginning of the holding period for the new company will depend on the transaction’s structure. In general, nontaxable transactions keep the holding period of the parent company, while taxable transactions start the holding period at the day after the transaction’s effective date.
One way spinoffs and split-offs differ is in how shareholders participate in the transaction. In a spinoff, company management makes the decision and all shareholders receive shares in the new daughter company. Split-offs usually require an opt-in from individual shareholders. This is accomplished through a tender offer in which the company offers to exchange some of its shares for a fixed number of shares of the new company.
Simply put, shareholders agree to trade parent shares for shares of the new company. Unlike a spinoff, in a split-off the number of shares participating stockholders own of the parent will decrease. The total shares held will decrease by one share for each share tendered and accepted for the exchange. Sometimes more shares are tendered than the maximum the company planned to exchange. In this case the number of shares accepted for exchange is decreased by a prorated amount.
Because each shareholder decides how many shares to tender in a split-off, the portion of a shareholder’s cost basis transferred to the new company may be different for each participant. Meanwhile, for a spinoff this ratio is essentially the same for all shareholders.
How do you tell whether you were involved in a split-off versus a spinoff? If the number of shares you own in the parent company decrease as part of the transaction and you had a choice to participate, the transaction was a split-off rather than a spinoff.