Corporate Spinoffs: Massive Impact for Corporate Treasury

Announcer  00:04

Welcome to the Treasury Update Podcast presented by Strategic Treasurer. Your source for interesting treasury news, analysis, and insights in your car, at the gym, or wherever you decide to tune in.

 

Craig Jeffery  00:18

Welcome to the Treasurer Update Podcast. This is Craig Jeffery, your host today. I’m joined by Dustin Senger from Knife River. Our episode today is called Corporate Spinoffs:  Massive Impact for Corporate Treasury. Welcome to the podcast, Dustin.

 

Dustin Senger  00:33

Thank you, Craig.  Thank you for having me.

 

Craig Jeffery  00:35

Corporations oftentimes go through acquisitions or acquiring other firms, they’re rolling things up. That’s much more the standard approach, and a much more common activity than spinning things off, having companies be separated. I wonder if you could walk us through the situation and the general challenge that that you had, and explain your situation for for everybody who’s listening.

 

Dustin Senger  00:59

So, prior to the spin off here of Knife River, Knife River had been part of an organization that was nearly 100 years old, had multiple businesses within it over that time, and at the time, had probably four different types of businesses within the organization. And so there was quite a bit of diversification within the company over time. We felt as a management team that the market and investors were probably not giving the company as much credit for that diversification, and the business wasn’t getting valued appropriately. So after a lot of discussions internally and a lot of hard conversations, the decision to spin off Knife River Corporation from its former parent was made back in August of 2022 the spin off was going to create a separate publicly traded company, standalone from from the parent, and the challenges of setting up new financing structures, new corporate teams, treasury that all came with that spin off.

 

Craig Jeffery  02:14

Maybe you could give us a little bit of background about the company and about Dustin just the quick overview, so people who may not be familiar with Knife River.  Knife River and the associated divisions, or you just so that they would get a little bit more info.

 

Dustin Senger  02:30

Sure. So Knife River Corporation is an aggregates led construction materials and contracting services business. We operate in about 14 states west of the Mississippi, and that’s including Alaska and Hawaii. And so when we say aggregates led, we provide the rock that goes into making ready mix. We make the ready mix. We actually do lay down services as well as part of our contracting services. So we’re vertically integrated in that way. I was with the former parent for nearly 17 years prior to moving down to Knife River. I was formerly treasurer at the parent, and then they moved me into the treasurer role here at Knife River. So I’ve been with Knife River for a year. But of course, since it was a subsidiary, I had a lot of familiarity with it. So I was part of the Knife River team when I was at the corporate parent. In my years with the parent, I was spent it all in Treasury, and I’ve been treasurer for probably five years prior to spinning off.

 

Craig Jeffery  03:37

And at Knife River, you’re treasurer. What areas are you covering in that role?

 

Dustin Senger  03:43

So as treasurer, I handle everything, cash management, financing, banking relationships, investing. I also participate in our shareholder services functions such as managing our stock transfer relationship. Also do some investor relations here and there. I’m also involved in the management of our various post retirement benefit plans, such as our pension and our 401, K and doing some investment advisory, or, you know, assistance on the advisory piece of those of those plans.

 

Craig Jeffery  04:18

You know, the challenges of a spin off. You hinted at a few of them, or you mentioned them by name. So I want to get into what is needed and what’s required, and it doesn’t have to be in this order, but one is about perspectives, the perspectives you have on maybe as you entered it, and the perspectives you have now post spin what would be useful ways of thinking for others. And then you had mentioned financing, but also the team. So how you think about people? And then any structures that may exist, that could be banking structures, could be credit facilities, anything related to structures. And then finally, if you want to touch on technology, but maybe begin with perspectives, what’s needed, what’s required, what did you wish you knew? Ahead of time, or what was the perspective that would be most helpful when

 

Dustin Senger  05:03

I think about the perspectives, I think time is probably one of the biggest challenges that we had when I look at the spin off, when we think back, we worked 30 plus years integrating Knife River into the former parent, whether it be systems benefits, it all of those functions, and then we’re spinning them off, and we have to get that done in a year to or less. And obviously time and managing your time was very, very important. When I looked at my role, when we announced the spin I started putting together game plans. I started putting together hierarchies for teams, you know, looking at how we want to structure our facilities, who wants to or who should be in our bank group, those types of things, you know, and then, and then, really it was the ultimate goal was to just have a continuity of our functions so employees, customers, vendors, any stakeholders. Did not see any disruptions from the spin when we announced in August of 2022 and then we completed the spin off of May of 2023 so that’s a pretty quick turnaround from a corporate spin off perspective, but I think we did a pretty good job of managing the timeline, but obviously there’s a lot of times where our timelines got compressed and we were kind of running up to the deadlines on some of our functions that we were trying to complete. But we did it, and we were we were very, very successful. So you know, again, kind of going back to time, working ahead, understanding that maybe my workflows aren’t going to be until January or February prior to the spin, but in the months leading up to those times, know exactly what you’re going to be doing and running through the various scenarios of like of you know, hey, I need to plan how we’re going to scoop out this treasury system. How are we going to work on the pension piece, how we’re going to split off all those investments into a Knife River standalone, knowing that we’re not going to be completing those tasks, but knowing what those steps are going to be well before starting it. So really just working ahead and working with your various vendors so they know that they could start planning for it, you know, and then plan for those milestones as they come along. You talked about people setting up another team for Knife River itself. We had to think about the fact that Knife River formerly did not have a lot of standalone corporate functions, like treasury, legal, sec and financial reporting. So knowing that we had to set up those corporate teams at Knife River, so we were moving folks from the parent down at the spin off to lead these teams. So setting up that team and who you were going to pull with you as you came down, and who, you know, looking at all the the functions and the processes of the various departments, and who, who you can bring with you to not only help make Knife River successful, but also who is going to get left behind to make Sure the former parent can operate as well, you know, and then obviously determining the level of staffing that you’re going to need for the spin off, we took the approach of being very lean, you know. As you know, a lot of treasury teams are lean already, but we were going to continue to be lean when we spun off. I wanted to give our group time to figure out what the true functions are going to be, what is it going to look like as a standalone company, then evaluate what is our true need from a staffing perspective within the group, and can we share resources with other departments? So you know, that’s been a year since we’ve spun off. We’ve probably waited long enough we probably have a good idea now of what our staffing needs to be, but that was the approach that I took when it came to the staffing of my team here.

 

Craig Jeffery  09:17

So you had continuity as a key driver the work ahead, idea about what will we be doing, and then the team and staffing, pretty interesting thoughts that right, as opposed to making sure you got coverage and then shrinking start off lean, what about the financing side of things? I mean, it’s a parent and a subsidiary. May have the same credit rating. They may be different. They may have very different needs, anything on that that you want to share?

 

Dustin Senger  09:45

Yeah, so from a financing perspective, it was something that we hadn’t done before at the former parent. So our former parent was investment grade. The financings that we had executed up there were relatively easy. Now, financing a subsidiary. It’s not investment grade, different industry as a whole that was that was challenging, and we had to issue more of the corporate bonds and indentures that we hadn’t done before. Had to really work to determine, Okay, what is our true working capital need here. And really, I want to say, thread the needle in a lot of cases when it comes to figuring out what type, what size of facility, credit facility we’re going to need, which banks need to be involved. You know, at the time of the spin off, we were going to market in a challenging banking environment. So when we think about 2023, we were going to market in, you know, the February, March, April, time frame, there were some bank failures. You know, during that period of time, there was a lot of uncertainty in the banking market. We had to work to get the the financing needed from the banks that that we chose, and we were very successful. And we appreciate all of our banks, and they did it. They all did a great job. And at the end of the day, we ended up with a successful financing structure, you know, a good blend of term loans and and revolver and bonds. And it just set us, set us up really, really well for the future. And a year after spinning off, you just look at the performance of the company and the demand that we actually have for our bonds now compared to a year ago, which there was, there was quite a bit of demand, but it’s still very, a very good market for for our bonds. So I mean, I think we, we did a very good job from a financing standpoint, though, there were some of the challenges that we had to work through at the time.

 

Craig Jeffery  11:46

Always a shock. If you sought financing as an investment grade and then as non investment grade, all of a sudden it’s like, hey, yeah, yes. Is a different market.

 

Dustin Senger  11:55

Yeah, absolutely different market. And it was kind of a wake up call from an interest rate perspective, when we, when we went to market and talking to our CFO and our CEO on on the rates, and kind of comparing them to what we were getting before it was, it was an eye opener. But again, we just have to execute as a company. And you know, over time, we could see those rates start to come down, and we just manage our manager balance sheet effectively.

 

Craig Jeffery  12:24

That makes sense. So shifting onto the people side, right? You you talked about setting up lean. What else have you learned through the process of, you know, bringing people down from the parent or structuring your group and figuring out where you are now and what, what you what you need after you’ve got a a year of being, you know, on your own.

 

Dustin Senger  12:43

Well, I think what we found was there were probably things that we thought we knew but didn’t know, and things that kind of come out of the woodwork when it comes to some of the activities that we’re doing. And I want to say before we were probably use a general term here, taking trying to fit a square peg into a round hole. So if folks are familiar with, you know, diversified corporations and maybe a centralized treasury function, you’re trying to look at services and products that are going to maybe fit, or try to fit, everybody in a hole, you know, as a whole group, but you know, it may not be the perfect fit. You know, what we’ve probably found, as we’ve spun out, is some of the services that we’re using, or some of the products that we had probably weren’t, weren’t perfect, or weren’t designed specifically for this business. And so I think that’s probably one of the things that that we found, and probably one of the things that excites me the most about trying to look for different products and services that are going to be more specific and we can customize specifically for this business and not having to worry about we have to look at how this is going to work with the regulated utility Business or the pipeline business, or our other construction companies, we can really hone in on, on what products and services fit, Knife River, specifically.

 

Craig Jeffery  14:09

You know, from from a structure perspective, or even cash management, the liquidity structure you have, the cash concentration method, spin is a day where things are separated, there’s there’s a lot of activity. And like you said, I think you guys are spending 30 years of pushing everything together for efficiency, pulling things apart. That can be a that can be a significant challenge. What, what did you experience as you were, were pulling out the cash management process from the combined entity.

 

Dustin Senger  14:41

So we were fairly lucky in that although the cash management process, I want to say is was centralized, so to speak, if each one of our specific business units at the parent had their own cash management structure. So. So Knife River, for instance, as a subsidiary, was pooling cash and sharing accounts at Knife River specific, and then cash, then from there was then pooled up to the parent. So actually splitting out bank accounts and functions that piece was fairly straightforward, because we have the structure there already when it comes to the systems that that’s probably where we it was a little more complicated. You know, we used a shared cash management platform and cash management banking system with our primary cash management bank. So creating new treasury management service agreements, splitting off the technology and getting all of that set up for on site, electronic deposit and payroll and all that kind of stuff. Splitting that out from a technology standpoint, was probably a little more difficult. We did a lot of work in advance, and kind of going back up to some of the perspectives and the needs and the priorities of the challenges was we looked at all of our processes within the cash management function and said, You know what, we don’t have to wait for the spin to get this done. We can get Knife River pulled apart and operate on a separate platform prior to the spin, so that we don’t have to worry about crossing those functions over on the day we’re spinning. So that was one of my primary focuses. And probably pat myself on the back a little bit. There were no no disruptions to any of our functions. I mean, there was probably one little techno technology glitch that lasted for about an hour or two. We got that fixed pretty quick, and from there, it was kind of business as usual for us and the teams out in the field. So it hats off to our internal team getting it done, and the bank group and our technology team getting it pushed over and split apart, continuing on, part of the technology and the structure. So we had an internally built, I want to call it a treasury workstation, or a treasury management system. I call it a baby TMS. It was something we designed. We’ve had it in place for probably 13, 14, years.

 

Craig Jeffery  17:18

Homegrown?

 

Dustin Senger  17:18

Homegrown, yep, homegrown system, and the functionality is really good. It’s the companies and the folks out in the field are very, very familiar with it, you know, we wanted to take that with us, so we had to scoop out, you know, lift and shift. We call it, you know, lift, Knife River out and put it on its standalone baby TMS. And, you know, that’s, that’s what we did. That was another, another function that was completed, and we were very successful with it. And, and, you know, now it’s, you know, taking a look at that baby TMS on a standalone basis, and asking ourselves, okay, do we want to continue to develop this? Or is there an opportunity for growth elsewhere, or to do something else with with this system?

 

Craig Jeffery  18:07

I guess one question about that is, if you developed it in house, who’s supporting it, and if there’s now two versions of baby TMS, I guess if it’s 13 years old, it might be, you know, adolescent TMS, right? It’s, it’s not a couple years but, but the fact that it’s a standalone is now you have a different IT group supporting it, or how does that work?

 

Dustin Senger  18:29

Yes, we have a different IT group that’s supporting it, a different developer group that’s really learning the system. Unfortunately, when we built this baby TMS, you know, 13, 14, years ago, we had one to one or two developers that are no longer with the companies, and so when they left then, you know, another group of developers had to come on and learn the system and learn the coding behind it. Well, now that we’re spun off, we have to have another developer learn it and understand it, and, you know, support it. So that’s probably the biggest challenge that we have, is we wanted to bring it over because we needed it. You know, we weren’t going to put something new in place in that short amount of time. But now it’s, how do we continually support this application, and how far do we want to take it?

 

Craig Jeffery  19:23

Excellent. Well, I want to shift to the advice section. You know, learning from spin offs, the wisdom that you’ve acquired, the scars that you have to to share with others. We’ve worked with a number of companies on spin offs, and there always seems to be something new, but there’s a lot of a lot of learning that really helps each additional spin off. And so maybe the first, the first section here is, if you could talk about for companies that are pre spin, maybe there’s a potential that there’s a spin, or maybe it’s just been announced, or maybe even before it’s announced, what any. Advice there?

 

Dustin Senger  20:00

Well, I think in that case, you want to have a firm grasp of your cash management systems and your banking structures, and then you also want to, in my opinion, need to have all of your functions mapped out and your processes mapped out. And that’s probably one of the things that we had a little bit prior to the announcement we had, you know, we had our functions laid out fairly, fairly well and how everything was structured. But, you know, things obviously fall through the cracks, and things change over the years. But I think those are probably two of the keys, even when you’re not spinning, is just understanding what your various structures are, and you know, having all your all your functions mapped out even further down the various vendors that you work with, for for the various processes.

 

Craig Jeffery  20:53

Great that you know that that view of all of the flows of information, data, funds, excellent as a spin becomes likely. Let’s say, you know, there’s some discussions about the market’s not valuing a company properly, and so a spin becomes more likely. What would what would your advice be there? How would that change?

 

Dustin Senger  21:13

Part of that is still tied to the first question we had, even pre spin, was creating a step plan so you understand how everything’s mapped out. But then go further and create a step plan of, how are we going to transition this and give yourself enough time? Because when you tell yourself, or someone tells you that, oh, we have enough time to do this, we can. We can push this off till, you know, down the road, or till we closer to spend, or you have a vendor that you know, or attorneys that you’re working with and say, yep, we have time for this. You’re probably lying to yourself if you’re saying that. So try to give yourself as much time as you can, you know. So create your step plan. Look at your various I want to say corporate policies, think, you know, rethink really hard about what your staffing is going to be, and then determine who your banking partners are going to be as well. So those are, those are some of the primary bullets that I would say as we announce a spin and you’re, and you’re working towards that, and then even kind of stepping back to, you know, looking at your your plan, or your your your roadmap, continue to refine that as you’re as you’re working through it, you kind of you start off with a basic outline, but then really hone in on, okay, there’s a step here that we need to take specifically for this function. Continue to enhance that step plan or road map, so that everything is laid out and you know exactly what you’re going to need to do to complete the spin off.

 

Craig Jeffery  22:44

Yeah. So the step plan, corporate policies, that’s a that’s an interesting one to the the staffing, you know, as you’re looking at the needs, if functions didn’t exist in the in the combined entity, or there was only one corporate treasury or one legal group. Now you’ve got, now you’ve got to be able to support what the new, spun off company will will do. That’s, uh, that that’s a, that’s a pretty big, challenging area.

 

Dustin Senger  22:44

Yeah, absolutely, not only from just picking the teams or structuring it, but also budgeting for it.  As a new company, you probably didn’t have all of these costs. You were getting them, I want to say, cross charge, but you weren’t solely responsible for the CFO or the chief legal counsel or the treasurer. So there was a lot of, we like to call them dissynergies that happen, you know, with a lot of these functions. So that was a that was one of the common themes as we were, were going through the process of, like, you know, calculating what the dissynergies were, and even as we were putting together the pro forma financial statements. I mean, we had to really calculate all those as best as we could, you know. So you had, you know, not only from a staffing perspective, but also a stock transfer agent that’s you have that function, you have the annual proxy and mailing process that has to go every year. You know, those costs are now borne by the standalone entity. So in addition to board costs and auditing, you know, you just kind of go down the line of new costs that were cross charged to the company. But not, you know, Knife River wasn’t paying for all of it. So that was an interesting process as well. Yeah.

 

Craig Jeffery  24:33

Now as we move towards transitioning, this is where, you know, you guys started the spin off August of 2022. Was announced. The spin off occurred May 2023.  How’d that transition work? I mean, obviously everything’s not completely done. There’s usually some type of agreements between organizations. How do you handle that? I’ll call it the handoff as gracefully as possible.

 

Dustin Senger  24:56

Like you said, there’s a transition agreement and it lasted for about a year. So we’re pretty much complete with that. From a handoff perspective. I think it went really well. You know, you work with the the individuals that are going to be replacing you up at the at the former parent. So I moved down, so I I spent quite a bit of time with my successor, you know, making sure that everything was set up, and he was had his learning opportunities to be able to to lead that group on a go forward basis. And conversely, there was probably some functions that you know, that I took on down here that I needed a little bit of guidance with. So it’s just really keeping the communication, you know, between the two businesses. What’s fortunate for us? It wasn’t like a divorce. Everything was was laid out. And the, you know, the relationships with with the former parent were, are very strong. We’ve worked with those individuals for long periods of time. So there was no, I want to say, challenges that that we, that we ran into, at least from my perspective, from a from a treasury perspective. Now, you know, obviously, when you’re when you’re splitting two companies out, you know, you have smaller teams that may be doing the same volume of work, so there’s workflow challenges. When I moved down, I knew that I was probably going to handle some of the workflow of the former parent until they were comfortable enough to take those responsibilities on on their own. So me, I felt, I, I felt very attached for for the full year with that business, with the former parent, and I was committed to making sure that they were successful.

 

Craig Jeffery  26:40

The other area is, nine months, 10 months. In some senses, it seems like you have all the time in the world. And others, you don’t have time. There’s a lot going on, and there can be urgency. I always remember this one, the tyranny of the urgent that will take you off of what you have to do to get things done. How did you manage the shrinking time window for the for the spin and the levels of urgency?

 

Dustin Senger  27:07

That’s a great question. I put in quite a few hours. The whole team did. But from managing that, it was chunking it together as much as you possibly can, as when you look at the volume of work that had to be done, you could take this away on your day to day life as well. But when you look at the the volume of work that needed to be done, you just had to come in and chunk out and say, You know what? I have to get through this, this agreement. I have to make sure everything’s lined up, and I have to get this to legal. I mean, just, just follow your checklists and follow your milestone timelines. And, I mean, that’s really a lot of the advice I can give. Try to minimize, minimize distractions, and then ask for help. You know, delegate as much as you can, because remember, as you’re working through the spin off, you still have to manage the day to day activities of the existing business. So it’s not like we added staff to complete the spin off. It was, you know, other duties as assigned.

 

Craig Jeffery  28:08

How do you measure success? I mean, you’ve said a few things where you said, this went really well. This went really well. How do you measure success for this?

 

Dustin Senger  28:16

So it can be difficult, but I look at it in the respect of, were there disruptions, when you can count on one hand the amount of things that went wrong, and they were relatively minor, I think that’s how I could I, how I would measure success. Did we, did our vendors get paid? Did our employees get paid? Did we encounter any fraud issues? And you know, during this time of transition, you know, that’s just on the cash management side. You know, we look at, you know, our credit agreements and the terms and the financial covenants within these, did we? Did we get good terms on these? And I think we did, you know. So I think, you know, even as a standalone, newly spun out company, we did a pretty, pretty good job. And then shareholder value. I mean, that’s the ultimate reason why we spun off was, did we create shareholder value? And the proof’s in the pudding. If you look at the two companies, and you look pre spin, what the market market cap was, the parent company, and then now you look at the two companies and what the market value is, we definitely created a lot of shareholder value in that time. Worth the effort. It was worth the effort, worth the, I want to say, the tears and the stress and and the the long nights reading through agreements and trying to get things transitioned over and, you know, working with banks and trying to obtain financing. And it was, it was all worth it in the end.

 

Craig Jeffery  29:39

Excellent. Dustin, thanks. Thanks so much for sharing about that. How you about measuring success? I think that’s a key area, and because many people don’t get a chance to do a single spin off in their career. So that’s useful. Thanks so much for your time. Any final thoughts or comments before we close?

 

Dustin Senger  29:56

More just reiterating that to. Time is such a huge factor here, and you never have enough time. So as much planning as you can do in advance of a specific workflow is going to pay dividends down the road, as you spin off, I think being prepared and working with the various groups and then stepping back and thinking about, we’re all in this together. We’re all a team. Understand that we’re all rowing in the same direction, creating that, that team culture and and working with the communication. That was probably another piece that, and I didn’t talk about, was the communication within the various groups, you know, understanding what each group was doing throughout the spin off so you can understand what their workflows were as well compared to yours, so that you can schedule the different processes and make sure that things can get done accordingly.

 

Craig Jeffery  30:53

Excellent Dustin, thank you so much for your time tonight.

 

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