Understanding Physical Split-off
1. Definition
A Physical Split-off (often referred to as an Equity Carve-out in global finance) is a corporate restructuring method where a parent company creates a new subsidiary and retains 100% ownership of the new entity's shares.
Unlike an Equity Spin-off, existing shareholders of the parent company do not receive any shares of the new subsidiary directly.
2. Key Structure
📊 Share Allocation
- Existing shareholders get zero shares of the new company.
- The Parent Company retains 100% control of the new subsidiary initially.
🔗 Corporate Relationship
- Forms a "Parent-Child" (Vertical) relationship.
- Shareholders only own the subsidiary indirectly through their ownership of the parent company.
💰 Primary Goal (IPO & Capital)
- The main reason for this split is to list the subsidiary on the stock market (IPO) later. selling shares to outside investors allows the company to raise massive amounts of capital for expansion without diluting the parent company's control significantly.
3. Key Example: LG Chem & LG Energy Solution
This is the most controversial case in the Korean market.
Scenario: You bought LG Chem stock because you liked its EV Battery business.
| Phase | Status | Your Portfolio |
|---|---|---|
| Before | LG Chem (Chemicals + Battery) | Shares of LG Chem (Includes Battery value) |
| After | Physical Split-off | Shares of LG Chem ONLY (You get 0 shares of the new LG Energy Solution) |
| Result | Subsidiary IPO | If you want LG Energy Solution stock, you must buy it separately. LG Chem's stock price likely drops due to the "Holding Company Discount." |
4. Comparison: Physical vs. Equity Split
| Criteria | Physical Split-off | Equity Spin-off |
|---|---|---|
| New Co. Shareholder | Parent Company (100%) | Existing Shareholders |
| Structure | Vertical (Parent-Child) | Horizontal (Brothers) |
| Main Purpose | Raising Capital (IPO) | Governance & Efficiency |
| Investor Sentiment | Negative (Dilution of value) |
Positive (Receive new shares) |
5. Why do retail investors dislike it?
- Loss of Key Assets:
- Investors bought the parent company for a specific high-growth business (e.g., Batteries). When that business splits off, they are left with the "empty shell."
- Double Counting Discount:
- When both Parent and Child are listed, the market discounts the value of the Parent company (Holding company discount), causing its stock price to fall.
- Dilution:
- As the subsidiary sells shares to the public (IPO) to raise money, the parent company's ownership percentage decreases, diluting the existing shareholders' indirect claim on the subsidiary's profits.