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What is 'Carve-Out'

A carve-out is the partial divestiture of a business unit in which a parent company sells minority interest of a child company to outside investors. A company undertaking a carve-out is not selling a business unit outright but, instead, is selling an equity stake in that business or spinning the business off on its own while retaining an equity stake itself. A carve-out allows a company to capitalize on a business segment that may not be part of its core operations.

BREAKING DOWN 'Carve-Out'

A carve-out effectively separates a subsidiary or business unit from its parent as a standalone company. The new organization has its own board of directors and financial statements. However, the parent company usually retains controlling interest in the new company and offers strategic support and resources to help the business succeed.

A company may use a carve-out strategy rather than a total divestiture for several reasons, and regulators take this into account when approving or disapproving such restructuring. Sometimes a business unit is deeply integrated, making it hard for the company to sell the unit off completely while keeping it solvent. Those looking at investing in the carve-out must consider what might happen if the original company completely cuts ties and what prompted the carve-out in the first place.

Two Types of Carve-Outs

In an equity carve-out, a business sells shares in a business unit. The ultimate goal of the company may be to fully divest its interests, but this may not be for several years. The equity carve-out allows the company to receive cash for the shares it sells now. This type of carve-out may be used if the company does not believe that a single buyer for the entire business is available or if the company wants to maintain some control over the business unit.

Another carve-out option is the spin-off. In this strategy, the company divests a business unit by making that unit its own standalone company. Rather than selling shares in the business unit publicly, current investors are given shares in the new company. The business unit spun off is now an independent company with its own shareholders, though the original parent company may still own an equity stake.

An Example of a Carve-Out

Carve-out strategies usually benefit both the parent company as well as the child company. For example, on July 14, 2011, ConocoPhillips, the nation's third-largest oil company at that time, reported that it planned to carve itself into two separate public entities. The reasoning was to separate the company's refining and marketing segment from its exploration and production business unit. The spin-off created the largest independent oil refiner company in the world. Investors were receptive to the news, and shares of ConocoPhillips rose nearly 10% on July 15, 2011.

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