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Looking to "de-consolidate" a division - ln search of insight...

We have a division of our company that we wish to separate from, with a goal of ensuring it is de-consolidated. We could sell it outright, but market conditions are poor and a successful sale is highly unlikely. We could shut it down, but that poses huge customer risks and large shut-down and severance charges.

An alternative is for us to allow division management to buy the unit from the parent in exchange for debt (so the deal would be seller-financed) and a less-than-20% equity stake (so the parent would own a piece of the new private company, but stay below the minority interest threshold). Part of the debt would be for working capital to get the division successfully through 2010 and make a running start at 2011. Assuming we don’t have any of the usual indicia of control (board seats, special voting rights, etc.) and this is thus genuinely a separate, private company, would this work (and be de-consolidated)?

I think the rules in this area, like FIN 46R, recently changed for the better, but wonder if anyone else has seen this done successfully. Many thanks for any comments.

BTW, I am asking this for a CFO friend of mine who, for disclosure reasons, cannot ask for himself. No, really.

Answers

Scott Lane
Title: CFO and CRO
Company: TPG Credit Management
(CFO and CRO, TPG Credit Management) |

The recent rules around this were from FIN 46(R) which was an interpretation of ARB 51 (all the referencing is now different given FASB codification).

The key is still whether the parent has control, FIN 46(R) just added more clarity and rules as to what defines control. With the current guidelines it is possible to be deemed to have control and consolidate an entity even if you have less than a 51% interest. Years ago that was primary variable to determine control.

However, if you are talking less than 20% control and you don't have other outstanding contracts or situations that could be deemed controlling, then I think it would be very unlikely that you would have to consolidate.

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