Is It A Sale Or Is It A Spin? It’s Both- The Magic Of The Reverse Morris Trust

In a famous Saturday Night Live sketch, a young Steve Martin promised that “You too can be a millionaire, and not pay taxes.”  While the advice he proceeded to give was ineffective, using a reverse Morris Trust, your favorite company can sell off a division and not pay taxes.

How you ask? Simple. First, borrow as much debt as you can against the division to be sold. Move the cash raised to the parent.  Next, spinoff the company to your shareholders. Immediately following the spin, merge the new company with the acquirer, such that the new company’s shareholders control greater than 50% of the merged company’s stock. That’s it. Pretty simple.

As with spinoffs in general, there has been an increase of late of reverse Morris trust activity. Proctor & Gamble’s(PG) recently scuttled deal to sell Pringles to the disastrous Diamond Foods(DMND) was to have been a reverse Morris trust. Entergy’s(ETR) sale of its transmission unit to ITC(ITC), projected to close in 2013, and MeadWestvaco(MWV)’s sale of its Consumer & Office Products division to ACCO Brands(ABD), which will close April 30, will be similarly structured as reverse Morris Trusts.

Disclosure: The author holds no position in any stock mentioned.