Carve-Out

A carve-out is a corporate action where a parent company sells a partial stake in a subsidiary or business unit through a public offering, creating a separately traded entity while retaining a controlling interest. Unlike a spin-off, the parent company receives cash from the carve-out and does not necessarily separate from the subsidiary.

What Is a Carve-Out?

In a carve-out:

1. The parent company files an IPO for the subsidiary
2. A minority stake (typically 10-40%) is sold to public investors
3. Shares of the subsidiary trade independently on the stock exchange
4. The parent retains majority ownership and control

This differs from a full spin-off where the parent distributes all shares to existing shareholders and loses control.

Why Do Companies Do Carve-Outs?

– **Raise capital**: the parent raises cash by selling part of the subsidiary
– **Value discovery**: subsidiary gets its own market valuation, which may reduce conglomerate discount
– **Flexibility**: parent retains control and can complete a full spin-off later if desired
– **Strategic positioning**: subsidiary gets its own listed currency for acquisitions and employee ESOPs

Carve-Out vs Spin-Off vs Divestiture

| Feature | Carve-Out | Spin-Off | Divestiture |
|———|———–|———|————-|
| Parent retains control | Usually yes | No | No |
| Cash to parent | Yes (from IPO) | No | Yes (from sale) |
| Subsidiary listed | Yes | Yes | Depends |
| Partial or full separation | Partial | Full | Full |

Practical Example

A large FMCG group decides to separate its food processing unit. Instead of a full spin-off, it does a carve-out, selling 25% of the food unit to the public through an IPO at Rs 300 per share. The parent raises Rs 1,500 crore and retains 75% control of the food unit. The food unit’s shares now trade on NSE, and analysts can independently value it.

Key Takeaways

– A carve-out is a partial IPO of a subsidiary, with the parent retaining majority control
– Parent company raises cash through the IPO while keeping controlling stake
– Creates a separately traded entity with independent market valuation
– Differs from spin-off (full separation, no cash) and divestiture (full sale, full exit)
– Often a first step toward a complete spin-off once the subsidiary establishes its own identity