Corporate Carve-Outs to Sponsors: The Carve-Out Playbook

Introduction

When Baxter sold its kidney care business to Carlyle for $3.8 billion, the purchase agreement was only the first of several contracts. Baxter's quarterly report lists a transition services agreement covering information technology, supply chain and corporate services for up to 30 months, a manufacturing and supply agreement running for up to ten years, and further agreements on long-term services, distribution, intellectual property and a short-term supply of saline. The price sat in one document; what the buyer could earn depended on the rest. That is a corporate carve-out seen from the sponsor's side: a fund buys a unit that has never operated as a separate company, from a seller that stays on as its supplier, service provider or shareholder. For the sponsor's coverage banker, most value questions sit outside the headline price: what the parent wants besides cash, what the unit will cost to run alone, and which services it still buys from its former owner.

A carve-out begins with a parent's decision, usually taken before any buyer is in the room, and the reason for it decides what the parent will trade against price. Four motives recur:

Sponsors read the same situation from the other side. The seller is motivated, with the exit decided at board level and often a public timetable. The unit may be under-managed, run to group targets, with investment rationed against other divisions. And the overhead it carried inside the group is rarely what it will spend alone, a cost question a sponsor with operating staff can try to answer better than the parent. Sponsors that spot a non-core unit before the parent hires a bank arrive with a view formed, the route described in how sponsors source deals and where banks fit.

Complexity can thin the field without guaranteeing a discount: a large carve-out run as a competitive auction can clear at a full price, and sponsors counting on complexity to make an asset cheap tend to lose to those that price the separation. Listed Japanese groups selling subsidiaries under capital-efficiency pressure have produced some of Asia's largest sponsor deals, covered in Asia sponsors and Japan's buyout boom.

Each motive also tells the sponsor which alternative the parent will hold its bid against.

The alternative a sponsor most often bids against is a spin-off, in which the parent distributes the unit's shares to its own shareholders. A spin can be tax-free to the parent and its holders if it meets the Section 355 requirements summarized in the guide to spin-offs, carve-outs and split-offs, but it raises no cash for the parent unless the new company borrows before separation and pays the parent a distribution, within limits set by tax rules and its own credit. The spun-off company must then stand as a listed company. A sale produces cash at closing and hands the separation work to the buyer, at the cost of tax on any gain. Many parents prepare both, a dual track that keeps buyers honest about price.

Baxter: From Planned Spin-Off to Sale

Baxter announced in early 2023 a plan to spin off its kidney care unit as a public company, later named Vantive, with about $4.45 billion of 2023 sales, close to a third of group revenue. According to MedTech Dive, Baxter began exploring a private equity sale alongside the spin in March 2024 and entered exclusive talks with Carlyle in late June. The agreement, signed on August 12, 2024, valued the business at $3.8 billion; Carlyle partnered with Atmas Health, a platform it had formed in 2022 with three healthcare executives. Baxter said the sale should maximize shareholder value and give it more flexibility to use capital. The deal completed on January 31, 2025, with pre-tax proceeds of about $3.71 billion and after-tax proceeds of about $3.3 billion, per the same quarterly report.

Pricing the Bid Against the Spin Case

The sponsor's argument is that the spin value is a forecast and the sale price is cash. The spin case arrives after a year or more of separation work, carries the costs of a small listed company and depends on where the shares trade once parent holders who never chose the stock start selling. The counterarguments are tax leakage and retained upside: a sale crystallizes tax that a qualifying spin avoids, and holders of spun-off shares keep any later recovery.

A sponsor moves that decision by raising the price, by taking risk off the parent (committed financing, few conditions, a fast timetable) or through tax structuring, a question for tax advisers rather than bankers.

What a sponsor pays and borrows in a carve-out rests on one estimate: what the unit will earn once it pays for itself. The parent's accounts start that work; buy-side diligence and the lenders' review finish it.

What the Carve-Out Accounts Show

A unit inside a group has no financial statements of its own until someone prepares carve-out financial statements. Under Staff Accounting Bulletin Topic 1B, the Securities and Exchange Commission (SEC) staff expects a subsidiary's or division's historical income statements to reflect all its costs of doing business, with common expenses allocated on a reasonable, disclosed method and, when practicable, management's estimate of the expenses on a standalone basis. That guidance applies to registered filings; in a private sale the seller often prepares management accounts that accountants review, with audited statements following when a bond offering or listing needs them. How the seller's bankers assemble them is set out in the industrials guide's carve-out article.

An allocation records what the parent charged the unit; the standalone cost is what the unit will pay alone for audit, insurance, treasury, tax, human resources and information technology. It can be higher, once the parent's purchasing scale is lost, or lower, if the unit carried a share of a head office it never used.

From Segment EBITDA to the Number Lenders Finance

The sponsor rebuilds the parent's segment earnings into a figure lenders can lend against, and each line is negotiated.

Pro Forma Standalone EBITDA

A carved-out unit's earnings before interest, taxes, depreciation and amortization (EBITDA) restated as if it had operated independently: parent allocations that end at closing are removed, the recurring costs of running alone are added, and one-off separation costs are excluded. It is the figure buyers price and lenders size debt on, adjusted further by any savings each party is prepared to credit.

Sponsor and lenders usually part ways on the last line, where planned actions sit:

At 5.0x leverage, the $15 million gap is $75 million of debt the sponsor must replace with equity. Lenders tend to accept the first three lines when quality of earnings work supports them and to credit only part of the savings, often within a cap in the credit agreement's EBITDA definition. One-off separation costs (systems builds, rebranding, hiring the functions the parent supplied) sit outside EBITDA, funded in the sources and uses or recovered through price. How a coverage team compares lenders' adjustments across financing offers is covered in how sponsors finance buyouts.

With no history of servicing debt, finance roles often newly filled and standalone costs unproven until a full year has run, a carved-out borrower gets its separation plan read by lenders as closely as its business plan.

The separation agreements decide whether the unit can operate the day after closing. Sponsors' operating partners usually own them, as how a private equity firm is organized explains, but their terms flow into the financing case and the price.

Transition Services and Reverse TSAs

Few carved-out units can replace a parent's payroll, systems and back office by closing, so the parent keeps supplying them under contract.

Transition Services Agreement (TSA)

A contract under which the seller of a business continues to provide specified services to it after closing, such as information technology, payroll, finance, procurement or logistics, for a limited period and an agreed fee, while the buyer builds or buys replacements. Each service usually has its own schedule, duration and exit terms.

Four terms carry the negotiation. Scope lists every service the unit consumes; a missed one becomes an emergency after closing. Duration runs service by service, with extensions for the slowest migrations, usually systems. Pricing is commonly cost or cost plus a margin, sometimes stepping up after an initial term to push the buyer out. Service levels usually hold the parent to its pre-sale standard. A reverse TSA runs the other way: when the sold unit housed a function the parent still needs, such as a shared plant, the buyer supplies it back.

Supply Agreements, Intellectual Property and Shared Contracts

Long-term commercial agreements tie the unit to its former parent as customer or supplier, protecting early revenue while concentrating it; Baxter's ten-year supply agreement with Vantive is a commercial relationship as much as a separation tool. Intellectual property used by both businesses is split or licensed back, often by field of use. Group contracts may need consent to assign or have to be divided, and parent guarantees can outlast the sale: Baxter's filing shows it keeping about $300 million of guarantees on leases and contracts, with Carlyle agreeing to indemnify it. In healthcare deals, the material adverse effect definition also adds sector exclusions, a different use of the word carve-out explained in the healthcare guide's article on MAE clauses.

Employees, Pensions and TUPE

Staff dedicated to the unit move with it; staff in shared functions often stay, so a carve-out buyer frequently hires a finance chief and team. In the UK, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply when the identity of the employer changes, as when a business is transferred out of a parent company: UK government guidance says the jobs usually transfer with their terms and continuity of employment, with duties to inform and consult. A share sale of a subsidiary leaves the employer unchanged, so the regulations usually do not apply. Defined benefit pensions are a frequent negotiation, settled by the parent keeping legacy plans or through price. Several continental countries add works council consultation before a binding sale, covered in European private equity sponsors.

On April 22, 2025, Boeing agreed to sell parts of its Digital Aviation Solutions business to Thoma Bravo for $10.55 billion in cash. Boeing's announcement named four assets (Jeppesen, ForeFlight, AerData and OzRunways) and said the proceeds would strengthen its capital structure while it prioritized keeping an investment-grade rating. Citi was Boeing's exclusive financial adviser, with Mayer Brown as legal counsel; Kirkland & Ellis advised Thoma Bravo.

Drawing the Perimeter

The perimeter followed the business model. Boeing sold the aviation data, charts and flight-planning software used by airlines and pilots, and kept the capabilities built on aircraft and fleet data: maintenance, diagnostics and repair services. Boeing's headcount of about 3,900 covered the whole organization, sold and retained parts together, a hint of the allocation work such a line requires. Boeing had bought Jeppesen in 2000 for about $1.5 billion and ForeFlight in 2019 on undisclosed terms. For Thoma Bravo, whose model is described in the sector specialist sponsor article, the deal created a standalone software company from units run inside an aircraft maker.

The sale completed on October 31, 2025, according to Boeing's annual report, and its fourth-quarter results recorded a gain of about $9.6 billion on about $10.6 billion of proceeds. The business relaunched as Jeppesen ForeFlight, based in Denver and San Francisco and led by Brad Surak, who had run Digital Aviation Solutions at Boeing.

Financing a Carve-Out in a Volatile Market

The debt came from private credit. A $4.2 billion package comprised a seven-year $4 billion term loan priced at 475 basis points over the Secured Overnight Financing Rate (SOFR) and a $200 million revolving credit facility, with Apollo as administrative agent and lead commitments from Apollo and Blackstone, joined by Blue Owl, Ares, KKR, Oak Hill Advisors and Golub, according to International Financing Review's (IFR) award write-up. It was the first deal for the $25 billion direct lending partnership Citi and Apollo announced in September 2024. Citi's head of debt capital markets for North America told IFR that without the private credit staple, bids could have arrived in the tariff volatility after April 2 with no financing behind them.

Three features carry over to other carve-outs. The parent's adviser was linked to a financing available to bidders, the trade-off examined in staple financing in sponsor sale processes. A club of direct lenders held the loan instead of selling it into the syndicated market, so the standalone adjustments they credited were ones they had diligenced and would carry themselves. And the seller needed cash and a clean exit, which a spin-off would not have delivered.

Not every parent takes all its value in cash at closing. One that doubts the sponsor's price, or wants part of the upside it is selling, can keep retained equity, lend part of the price back or accept contingent payments.

Emerson and Copeland: Staying In After the Sale

Emerson's sale of its climate technologies business to Blackstone used two of those tools. Under Emerson's annual report, it completed on May 31, 2023, at a $14.0 billion valuation: Emerson received about $9.7 billion of upfront pre-tax cash and a note receivable with a face value of $2.25 billion, and kept a 40% common equity interest in the business, renamed Copeland. In August 2024 Emerson sold that stake to Blackstone funds for $1.5 billion and the note to Copeland for $1.9 billion, bringing its cash from the business to about $13.1 billion over 15 months.

Seller Note

Deferred purchase consideration in the form of a loan from the seller to the buyer or the acquired company, repaid after closing. It reduces the cash and debt the buyer must raise at signing, usually ranks behind the acquisition lenders, and leaves the seller exposed to the business it sold.

The tools trade cash for alignment. A retained stake lowers the sponsor's equity check and keeps the parent invested in the separation, but gives it governance rights and a voice on the exit; a seller note reduces third-party debt, and lenders will want it subordinated. Earn-outs tie part of the price to later results, as in Telecom Italia's network sale described in infrastructure and real assets funds as sponsors.

The Mandates One Carve-Out Creates

A carve-out generates more bank roles than most acquisitions. The buyer's adviser works on value, separation terms and the parent's priorities, as in buy-side advisory for sponsors, and a carve-out can become a platform for years of add-ons, as the Core & Main case shows. The full list:

Whether a sponsor bought a carve-out cheaply is usually argued in the wrong place. The gap between segment earnings and the standalone figure lenders finance is not a discount; it is an estimate of what independence will cost, and it can be wrong either way. What a sponsor can capture is narrower: the difference between the uncertainty a seller prices in at signing and the uncertainty left once the last transition service is switched off and a full standalone year has been audited.

That is why a carve-out bid arrives with a separation plan beside the price, and why its most consequential numbers are often the smallest: a standalone cost line, a transition service fee, an exit month for the systems migration. Each is a claim about value that the first standalone year will test.