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American Cyanamid’s Cytec’s Spin-Off

American Cyanamid’s Cytec’s Spin-Off. Ron Bangco Frank Abrao Katie O’Neal Christina Natale. Agenda:. The Chemical Division Spin-off into Cytec Industries. History of American Cyanamid. Founded in 1907 as a manufacturer of fertilizer, calcium cyanamide

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American Cyanamid’s Cytec’s Spin-Off

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  1. American Cyanamid’s Cytec’s Spin-Off Ron Bangco Frank Abrao Katie O’Neal Christina Natale

  2. Agenda: The Chemical Division Spin-off into Cytec Industries

  3. History of American Cyanamid • Founded in 1907 as a manufacturer of fertilizer, calcium cyanamide • In the 40’s and 50’s, they strengthened their position in medical products • Lost market share in its consumer products division in the 60’s and 70’s • In the 80’s Cyanamide focused on its core businesses (life sciences) • Sell or spin-off unrelated or poorly performing assets • 90’s, Cyanamid initiated asset sales of some of its consumer products • 90’s, Prior to spin-off sold some of its chemical business without their liabilities

  4. Chemical Division (Cytec) 1990 - Chemical businesses generated 25% of sales, posted $171.5 million loss 1991 - Chemical division generated 23% of sales with only 5% earnings 1991 - Chemicals division’s made a separate, unincorporated business unit called Cytec Industries 1993 - Cytec officially spun off Cyanamid - Cytec (chemical division) held unrelated businesses - Held liabilities of previously sold businesses

  5. Net Income of American Cyanamid's Division

  6. Chemical Division (Cytec's) Sales and Net Income (in millions)

  7. Advantages to Cyanamid • Focused on core competency • Reduce liabilities • Environmental • Retiree Health Care • Life Insurance • Pension • Dividend’s of $14.6 million per year

  8. Divestiture options on chemical division (Cytec Industries)? • Asset Sale • Equity Carve Out • Spin-Off

  9. Asset Sale • Subsidiary is sold to a third party • No new firm is created • No effect to rivals Pros Receives Cash Creates value to shareholders of parent firm Cons Tax Implications – Tax on sale AI – stock is overvalued

  10. Equity Carve Out • Parent firm issues equity of a subsidiary • Parent firm receives cash • New firm is created • Subsidiary • Substitute to equity financing • Buyers of new stock become shareholders of the subsidiary firm • Parent Firm usually maintains a controlling interest in the new firm

  11. Equity Carve Out Pros Creates value to shareholders of parent firm Incentives for management Greater monitoring AI – signaling parent firm undervalue Cons Tax Implications – Tax on sale AI – subsidiary stock is overvalued Transaction Cost

  12. Spin-Off • Equity issuance • New firm is created • Parent firm does not receive cash in transaction • New shares distributed to existing shareholders as a pro rata dividend • Shareholders of the new independent firm are the same share holders as the shareholders of the parent firm • Tax free transactions • Distributes minimum 80% of the shares for the subsidiary

  13. Spin-Off Pros Creates value to shareholders of parent firm Greater monitoring Positive information on subsidiary Cons Rivals of Spin-off experience positive return

  14. How is Value Added? • Better Management of new independent carved out firm (Equity Carve Out and Spin-Off) • Easier to set up incentive based contracts • Publicly traded equity • Compensated on stock performance • Greater monitoring and information production about the new firm • Analysts, Credit Ratings…

  15. Equity Structure • Cytec issued approx. 12.8 million shares of common stock pro rata to Cyanamid shareholders • 7 shares of ACY received 1 share of CYT • Cytec issued preferred stock to Cyanamid with aggregate face value of $200 million • Three tranches • Tax implications • Gave up tax advantage to retain more control

  16. Three Tranches • Series A • Annual cash dividend, 15 year life, transferable and redeemable after 4 years, in full after 6 years • Series B • Annual cash dividend, 15 year life, transferable, convertible to 30% of Cytec stock • *Covenant for Series A and B: missed dividend payment of 6 or more, entitles the right to elect 2 directors • Series C • Annual cash dividend, perpetual life, restricted covenants, non-transferable, entitles election of 1 director

  17. Calculating Value Announcement Date at close February 23 Closing Price February 22 $47.00 February 24 $49.25 Change 4.8% increase in value

  18. Ron Bangco Frank Abrao Katie O’Neal Christina Natale Q&A Standing Behind Our Decision

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