A scrip bid is a type of takeover bid where the acquiring company issues its own shares to the target company's shareholders in exchange for their shares.
The acquiring company's shares are often overvalued, making the scrip bid more attractive to the target company's shareholders.
A scrip bid can be a way for the acquiring company to avoid paying cash for the target company, which can be beneficial if the acquiring company is short on cash.
This type of bid is also known as a "share-for-share" bid, where the acquiring company's shares are used to purchase the target company's shares.
A different take: Cover Corp Shareholders
Types of Scrip Bids
There are two main types of scrip consideration ratios: fixed and floating ratios.
A fixed ratio involves a specific number of bidder shares exchanged for each target share.
Most scrip deals in Australia use a fixed exchange ratio.
The use of a fixed exchange ratio raises questions about when to determine the implied value of the scrip consideration and how often to update it.
Broaden your view: Colonial Scrip
In a fixed ratio, the bidder agrees to exchange a specific number of shares, whereas in a floating ratio, the bidder agrees to pay a fixed dollar value and the scrip consideration is given equivalent to this value.
The majority of scrip deals in Australia use a fixed exchange ratio, which simplifies the process but still requires careful consideration of the implied value.
Take a look at this: Scrip Issue
Regulations and Requirements
In the context of a scrip bid, the Corporations Act sets clear guidelines for both the bidder and the target to follow. The Act requires that all parties act within its boundaries.
The Takeovers Panel provides guidance on how to present information in a scrip bid, and it's essential to adhere to these guidelines. This ensures a fair and transparent process for all parties involved.
The bidder and target can strategically choose dates to calculate the implied value of the scrip consideration, but they must do so within the bounds of the law. This means presenting information in a favourable light without crossing the line into manipulation.
The Corporations Act and Takeovers Panel guidance are in place to prevent cherry-picking of dates, which can be used to present an unfair or misleading picture of the scrip consideration's value.
Consider reading: Merger Guidelines
Deal Listings
Scrip bid deal listings can be a great way to find a good deal on a property. A scrip bid is a type of bid where the buyer pays a portion of the purchase price upfront and the rest is paid through a promissory note.
The deal listings for scrip bids typically include the property details, such as the address, square footage, and number of bedrooms and bathrooms. This information helps potential buyers quickly determine if the property is a good fit for their needs.
See what others are reading: Open Listings
All Deals
In an all-scrip deal, investors trade their existing shares for a pre-determined number of shares in the combined company.
The value of these shares can fluctuate depending on the share price of the company offering the deal. For example, in the proposed takeover bid by Australian Clinical Labs (ACL) for Healius (HLS), the value of Healius shares fell below their current price and Morningstar's fair value estimate.
Investors need to assess the intrinsic value of the shares they'd receive and their resulting stake in the combined company. They also need to consider the value of their current investment.
A scrip deal can be partly or wholly in place of cash, making it more complex for investors to evaluate. The graph below shows the value of 0.74 of an ACL share over the last few months against the value of 1 Healius share, demonstrating the added level of complexity scrip-deals present investors.
The proposed offer by ACL for Healius undervalues Healius' prospects, according to Morningstar analyst Shane Ponraj. The offer values Healius shares at around $2.66 a piece, which is a 25% discount to Morningstar's $3.55 fair value estimate for Healius shares.
For more insights, see: Morningstar DBRS
Foreign Deals
Foreign Deals can be complex and influenced by various factors. The potential takeover of ASX-listed gold miner Newcrest by industry giant Newmont is a prime example. Newmont's shares trade in the US, which means the deal's value is tied to fluctuations in the US-AUD exchange rate and changes in Newmont's share price.
The initial offer was rejected by Newcrest's board, but a new "best and final offer" was made, exchanging each Newcrest share for 0.4 of a Newmont share. This offer valued the deal at around $30.96 per Newcrest share. Newmont will allow Newcrest to pay a further fully franked special dividend of up to about $1.67, without reducing its offer.
The deal's value is significantly impacted by changes in Newmont's share price. Morningstar analyst Jon Mills notes that the deal recognises the value in Newcrest, including the likely recovery in production at its flagship Lihir mine in Papua New Guinea and its Brucejack mine in Canada.
Here's an interesting read: Newcrest Mining
Frequently Asked Questions
What is an example of a scrip?
Examples of scrip include rewards points, gift cards, and coupons, which can be used in place of cash at specific companies or stores. These alternative currencies are redeemable for goods and services at participating merchants.
What happens when a company makes a scrip issue?
When a company makes a scrip issue, it creates new shares and gives them to existing shareholders for free. This increases the number of shares they own, potentially boosting their value and dividend payments.
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