Case 3

USX: Targeted Stock Restructuring

You have been asked to evaluate USX’s targeted stock proposal.
Targeted stock can be thought of as “middle ground” between the
polar extremes of remaining in a conglomerate and a complete bust-
up. There are, however, other alternative middle ground options. For
example, USX might perform a partial carve-out or a partial spin-off of
the steel division. To do so, it would first create a new, distinct
corporate entity out of the steel division. It would then either carve-out
(i.e. sell via IPO) or spin-off (i.e. distribute to existing stockholders) a
minority stake in this new entity, say 15% of the shares. Like targeted
stock, this would create a separately traded stock while at the same
time keep the control of the two divisions under one roof.

To prepare: Take a look at the course readings (especially “Breaking

Up Is Hard to Do”)

1) Based on the data available to you, do you think that USX is under-
performing or over-performing from an operating viewpoint? Explain.

2) Based on the data available to you and using relative valuation

techniques, is USX trading at a discount or a premium? What is the
magnitude of this discount or premium in percentage terms?

3) Evaluate the pros and cons of the following four options for the
specific case of USX:
a) Status quo (no restructuring).
b) Targeted stock
c) Partial carve-out or partial spin-off.
d) Complete spin-off.
Be detailed but brief in your answer. On balance, which one would you
recommend?

4) (optional) Assume that USX is committed to the basic targeted stock

concept. Are there any details of the structure that ought to be
modified?