Capital structure decisions in the context of corporate spin-offs : the case of PT Multimedia

Abstract

In February 2006, Sonae presented a hostile takeover offer for 100% of Portugal Telecom’s (PT) outstanding shares. If it was accepted, it would have been the largest ever business deal in Portugal. Although the offer was rejected, it changed the Portuguese telecommunications industry by leading to the separation of PT and Portugal Telecom Multimedia (PTM) via spin-off. In this thesis I examine the motivations for this spin-off transaction and its implications on both firm’s capital structure decisions. By comparing each firm debt level (implicit debt level) with the one that would minimize their cost of capital (optimal debt level), derived via WACC minimization, I conclude that after the spin-off, the capital allocation efficiency worsened significantly. Furthermore I argue that in both PT and PTM the deterioration was a direct consequence of the spin-off. As such, my findings contrast with previous studies that suggest that capital allocation efficiency improves, or at least remains unchanged, following a spin-off.