Tax-free spin-off roadmap - EY

1 Tax-free spin -off roadmapImproving capital allocation, operations and investor focusC r e a ti n g v a l ue by s p i n n i n g of fSpin-offs are tax-efficient transactions that can create value in three key ways: More focused capital allocation, including M&A, because SpinCo can control free cash flow and investment decisions Improved operations through management focus on core business and removing redundant systems and infrastructure Better alignment with investor preferences ( , risk exposure, capital structure and industry)S p i n - of f v a r i a ti on sWhile here we discuss a traditional Tax-free spin -off, there are some similar transaction types that you may consider: M or r i s T r us t Following a spin -off, a third party acquires stock representing less than 50% of the vote and value of RemainCo.

2 R e v e r s e M or r i s T r us t Following a spin -off, a third party acquires stock representing less than 50% of the vote and value of SpinCo. S p on s or e d s p i n A private equity or other investor acquires less than 50% of RemainCo or SpinCo. These variations may also be effectuated in a split-off, in which RemainCo redeems a portion of its stock in exchange for SpinCo stock. 2T h e c h a l l e n g e sIn its operational, regulatory and strategic complexity, a Tax-free spin -off is something of a three-headed beast: as demanding as any business carve-out, with added requirements akin to those of an initial public offering (IPO), plus the close involvement of tax authorities and the Securities and Exchange Commission (SEC). All this adds up to an undertaking whose challenges, costs and pitfalls are not to be underestimated.

3 Challenges can include lost synergies, potentially high transaction and tax costs, separation of talent, SpinCo/RemainCo conflicts of interest, regulatory hurdles and business h e a n s w e rConsidering the vast dispersion of returns that companies experience post- spin , here we outline the most critical steps to understanding whether or not a spin -off is feasible and how to complete a successful a x - f r e e s p i n - of f r oa d m a p1 to 2 months4 to 6 months4 to 5 monthsF e a s i bi l i ty of ta x- f r e e tr e a tm e n tD e c i d e / a n n oun c e p ubl i c l yF or m 1 0 initial filing C a p i ta l m a r k e ts a n d s tr uc tur eS ta n d a l on e a n d op e r a ti on a l s e p a r a ti onF i n a n c i a l r e p or ti n gT r a n s a c ti on g ov e r n a n c eM i l e s ton e sT a xDetermine costs of restructuring debtPropose capital structure for each company Develop equity story Forecast cash flow and develop a view of standalone

4 Costs, and estimate one-time costsEngage rating agencies and prepare data room materialsEstablish transaction governance modelDetermine ParentCo versus SpinCoExec Steering Committee/ Board design checkpointCommunicate to stakeholders, including internal clearance storySelect SpinCo managementDefine separation timelineTax feasibilityDetermine tax basis, earnings and profits and fair market valueDevelop legal entity step planCarve-out FS planningPrepare SEC-compliant carve-out financial statements with standalone tax provisionComplete external audits of historical financialsCompile pro forma financial informationPlan for SEC registration and review (Form 10 drafting)Develop IT solution for carve-out financial reportingApply for private letter ruling if necessaryRefine proposed capital structure to optimize tax efficienciesResolve intercompany agreements and settle accountsDetermine the desired level of separation on Day 1 Develop public company governance and corporate infrastructure Define the operating model and organizational design of both companiesAssess time required to establish new legal entities Plan separation of SpinCo and RemainCoS p i n - of f ti m e l i n e44 to 5 months2 to 4 weeksDuration to exit TSA variesF or m 1 0 e f f e c ti v e d a teS p i n d a teT S A e x i ts / f ul l s ta n d - a l on eConduct roadshows.

5 Investor day and investor relationsExec Steering Committee/ Board go-live checkpointBoard approval of record dateSpinCo corporate governance in placeEstablish SpinCo BoardBegin implementation of capital structureIssue/exchange debtPrepare quarterly financial updatesPrepare quarterly financial updatesPrepare initial Form 10-Q or 10-K filingSEC initial review and amendment period Address RemainCo discontinued operations reporting matters (Form 8-K)Apply for private letter ruling if necessaryPrepare supporting documentation for Tax-free treatmentDevelop TSA scope and duration, a tax-sharing agreement and other arrangementsSpinCo tax function designPrepare public documentation and related disclosuresDevelop public company governance and corporate infrastructure Define TSA requirements Exit TSAs and stand up functions for steady stateAssess time required to establish new legal entities Execute separation and standup functions for Day 1S p i n - of f ti m e l i n e5T a x - f r e e s p i n - of f r oa d m a pF e a s i bi l i ty of a s p i n s ta x - f r e e tr e a tm e n tT a x - f r e e s p i n - of f s a r e e x tr e m e l y c om p l e x a n d m us t s a ti s f y m a n y l e g a l a n d r e g ul a tor y r e q ui r e m e n ts.

6 F a i l i n g a n y of th os e r e q ui r e m e n ts c a n r e s ul t i n s h a r e h ol d e r a n d / or c or p or a te - l e v e l ta x . U n d e r s ta n d i n g p ote n ti a l s p i n - of f c a p i ta l s tr uc tur e a n d a s s oc i a te d c os ts i s a l s o c r i ti c a l i n m a k i n g a tr a n s a c ti on d e c i s i on . B e l ow a r e k e y a n a l y s e s to d e te r m i n e i f a tr a n s a c ti on i s f e a s i bl e f r om a ta x a n d c a p i ta l s tr uc tur e p e r s p e c ti v e .Will a Tax-free spin -off achieve your business objectives? A spin -off must effectuate a complete operational separation of RemainCo and SpinCo, and RemainCo generally must distribute all of its stock of SpinCo.

7 Both RemainCo and SpinCo must have at least one qualifying active trade or business (ATB) that has been conducted continuously for five years immediately prior to the spin -off. A Tax-free spin -off cannot be part of a shareholder plan to dispose of a controlling interest in either RemainCo or SpinCo, which can significantly restrict post-spinoff M&A activity. spin -offs present only a limited ability to monetize SpinCo you have a valid corporate business purpose for the spin -off? The spin -off must be motivated in whole or substantial part by a real and substantial non-federal tax purpose germane to the business of RemainCo, SpinCo, or their respective affiliates ( , a shareholder purpose alone does not qualify as a corporate business purpose ). The corporate business purpose needs to clearly demonstrate the need for the RemainCo and SpinCo each have an ATB?

8 Both companies must have at least one qualifying ATB, which means more than simply conducting a business . The ATB s key business functions must be performed by employees of RemainCo, SpinCo or their affiliates; independent contractors are excluded from the you restructure your outstanding debt in a tax-efficient way? A spin -off can require a company to restructure its debt, potentially at a large or prohibitive r i ti c a l s te p s to m a n a g i n g a s uc c e s s f ul d e a l6T r a n s a c ti on g ov e r n a n c eEstablish a spin -off transaction governance model don t underestimate the importance executing these seemingly routine tasks: Define spin -off game plan, form transaction team and communicate objectives to kick off the transaction efficiently and avoid a slow start Decide which internal and external stakeholders should know about the transaction and strategic plans before they are public, and develop messaging accordingly Set targets, delegate and monitor progress through reporting in order to manage the complexity of a spin -off and maintain accountability Define the separation timeline and align work streams to key deadlines and milestones to maintain momentum, track progress and target the desired close date Consider the appropriate role of SpinCo management.

9 SpinCo management is typically involved in SpinCo organizational design and setting the strategic vision because it will be responsible for execution Establish board of directors oversight and knowledge of key events through the entire process; there should be routine dialogue between the board and managementC a p i ta l m a r k e ts a n d s tr uc tur eC a p i ta l s tr uc tur ePropose capital structure for each company based on its cash flow and growth profile Review terms of outstanding debt; consider debt to target for exchanges and restructuring in order to minimize transaction costs Determine how historical liabilities will be split ( , pension obligations) Assess Day 1 cash requirements because the companies existing cash may not be sufficient for working capital needsForecast cash flow and develop a view of standalone costs Will be an input into the pro forma Form 10 disclosures and debt and equity roadshows Helps determine interest and dividend payments available to the market Determine one-time costs and who will pay in order to assess funding needsW h a t s be i n g d i s tr i bute dDetermine which business will be retained ( , RemainCo) and which business will be distributed ( , SpinCo)

10 Legal and/or regulatory restrictions may limit asset/stock transfers Distributing business with lower inherent tax gain may be preferredDetermine profile of the stock to be distributed ( , voting rights, distribution ratio, dividend policy) Consider the distribution ratio and a reverse stock split if the anticipated share price is suboptimal A split-off may benefit from a subsidiary IPO to set the market price, allowing for an exchange offerDevelop the equity story for roadshows to garner sufficient market interest and avoid post-close sell-off 7T a x - f r e e s p i n - of f r oa d m a pT a xDevelop legal entity step plan Mitigates potential business, operational, financial and tax impediments and costs Legal entities with commingled operations, multiple non-US jurisdictions, and legal or regulatory restrictions on transferability of assets drive transaction complexity Legal and/or regulatory restrictions may limit asset/stock transfersDetermine tax basis, earnings and profits (E&P)