Question

If a restructuring company is in need of new funds and the IPO market is cold, it would make sense for it to do an equity carve-out.

True or False

Answer 1

FALSE. Equity carve-out is a strategy in which the parent company forms a subsidiary and transfers a part of its business to the subsidiary and does an IPO for the shares of that subsidiary. The shares retained by the parent company after the IPO are such that the parent company is still able to exercise the management control over the subsidiary. If the IPO market is cold then the parent company might not be able to realize the fair value for stocks of its subsidiary.

It is also possible that the shares might be under subscribed thus creating not raising sufficient funds through the subsidiary as planned. In such times it is better to go with a FPO (further public offer), wherein the existing shareholders can be roped in to raise funds for the company. An institutional investor or private placement routes can also be considered.

It is also viable if the parent company can get the existing debt restructured and the tenure of the loan extended. This will create a free cash flow for the company.