The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 12, July 2001, Panel Publishers, New York, NY.

SPINS AND NO SPINS

By Robert W. Wood

Spinoff news (like everything else except news of economic woes) has slowed of late. Still, despite the problems that many spun-off companies have encountered (leading in some cases to "reverse" spins), there are some new ones in the news. (Regarding the topic of reverse spins, see Wood, "Spins and Reverse Spins," Vol. 9, No. 9, The M&A Tax Report (April 2001), p. 5.) For example, Aon Corp. announced it would spinoff its insurance underwriting operations, creating an independent, publicly-traded company. Predictably, Aon announced that insurance regulators would have to approve the deal, and that an IRS letter ruling would be needed. See "Aon Plans to Spin Off Underwriting Unit, Warns on 1st Quarter," Wall Street Journal, April 23, 2001, p. B8.

Aon (based in Chicago) is the world's number two insurance broker, and the "combined specialty," its underwriting division, accounted for 34% of group sales and 25% of operating profits for the company last year. Analysts have valued the business at about $2.1 billion. The idea of the spinoff of Aon's underwriting division is to focus on the brokerage unit, to eliminate conflicts, and to improve growth across various business lines. See Cameron, "Aon Set to Spin Off Underwriting Division," Financial Times Weekend, April 21-22, 2001, p. 8.

More significantly, USX Corp. finally announced it would split up U.S. Steel Corporation and Marathon Oil into separately traded companies. When this occurs it will end what began roughly 15 years ago as an experiment to combine U.S. Steel and Marathon, allegedly helping the company's down cycles in steel with the supposedly helpful oil operations. See Matthews, "USX to Split U.S. Steel and Marathon Oil," Wall Street Journal, April 25, 2001, p. A2. With the current oil prices, the spin should be good news for Marathon Oil shareholders. Again, news reports suggest that the Internal Revenue Service will have to approve the transaction as tax-free. Id.

AT&T Gets Green Light

Elsewhere, in one of the more important spins, AT&T has announced that the IRS issued the ruling blessing the spinoff of its wireless group. See "Spinoff of Wireless Group Will Have Tax-Free Status," Wall Street Journal, May 31, 2001, p. B13. AT&T expects the wireless company to be publicly traded as an independent company by mid-summer. In a development we've covered before about AT&T tracking stock, AT&T announced that some of its common shares were tendered on a preliminary basis in exchange for a whopping 438.2 million shares of AT&T wireless group tracking stock, in preparation for the spinoff.

From a broader perspective, AT&T is in the process of a restructuring which includes breaking AT&T into separate wireless, broadband and business and consumer long distance companies. There are supposed to be two additional tracking stocks created for units. Shareholders are to receive the complete restructuring package for approval within the next few months. Id.

UK and E-commerce

Across the Atlantic, Boxclever, the UK's largest home electronics rental group, is spinning off its technical servicing, delivery and installation business into a separate company. The new entity will be called Endeva. Boxclever's service business currently accounts for about £180 million of the company's £600 million of annual gross receipts. See Roberts, "Boxclever in Endeva Spin-Off," Financial Times, April 30, 2001, p. 16.

On the "no spin" side of the page, Vista International has scrapped its previously announced plans to spinoff its e-commerce service, PubEasy. In September 2000, Vista had announced that it was talking to a number of parties about their investments in PubEasy and that the e-commerce company would be spun off to allow for the new investment. Of course, the market has dramatically changed, particularly e-commerce companies. See Milliot, "No Spinoff for PubEasy, Clifton Departs, Others to Follow," Publishers Weekly, April 30, 2001.

Reversal of Fortune

Finally, as evidence that reverse spins sometimes need to be undertaken, consider Disteon Corp., the automotive parts supplier. Disteon was hacked off from Ford Motor Company in June of 2000, not so long ago — but perhaps at a bad time. Ford gave Disteon many of its problems in its haste to match the successful 1999 spinoff of General Motors Corp.'s component maker, Delphi Automotive Systems Corp. But General Motors gave Delphi six years to get its business up to speed. In contrast, Ford did not allow Disteon nearly as much time.

The interrelationship between Disteon and Ford has been strained, with the separation agreement requiring Disteon to immediately cough up 5% price cuts to Ford, Disteon's biggest customer. Then, of course, came the Bridgestone/Firestone, Inc. tire crisis mess, with Ford halting production of its popular Explorer SUV. This alone cost Disteon (which supplied Explorer parts) an estimated $16-18 million in lost profits. See Muller, "Disteon: Thrown Into the Deep End; the Ford Parts Spin-Off Can't Seem to Catch a Break," Business Week, May 7, 2001, p. 78.

Lastly...

In the most interesting spinoff development this month, meriting separate treatment (see "REIT Spinoffs" elsewhere in this issue), the IRS issued a ruling that companies can spinoff real estate assets tax-free as REITs.

Spins and No Spins, Vol. 9, No. 12, The M&A Tax Report (July 2001), p. 7.