Explaining the pro rata part of the Great Bear-Kinross deal – the C$29 cash isn’t guaranteed

We heard some comments in the past week how ‘buying Great Bear at C$28.50 and selling to Kinross at C$29 in cash is the easiest C$0.50 they can make’. This is only partially correct. In our previous update, we mentioned both the cash payment and the share payment are subject to a pro rata provision which allows Kinross to limit both its cash outflow and the amount of shares it prints. Shareholders will only receive the C$29 in cash if less than 75% of the shareholders elect the cash option. So those who want the cash should actually hope less than 75% of the shareholders do.

The current value of the deal

To determine how interesting the offer now is, we are looking at the offer using the closing price on Friday. Great Bear ended the day at C$28.55/share, Kinross ended the day at C$6.77.

The cash bid of C$29 obviously remains C$29, that goes without saying.

The stock bid has now obviously changed in value. Kinross offered 3.8564 shares per share of Great Bear. While that represented C$29 at the time the offer was made, 3.8564 shares of Kinross Gold now represent a value of just C$26.10/share if one would accept the stock bid.

What if things get pro-rated?

This means that most Great Bear shareholders will likely take the cash option. After all, why would you take Kinross stock if you could take C$29/share in cash and use that cash to buy the same amount of Kinross stock while taking some cash off the table. While there may be some legit reasons why it would be better for some shareholders to swap stock for stock, most Great Bear shareholders will prefer C$29 in cash over C$26.10 in stock.

This means the pro rata feature of the Kinross bid is becoming very important (and will be increasingly important the further the Kinross stock dips). So let’s run two scenarios, explaining how the pro rata feature may impact the value of Great Bear stock and why the stock is trading at a small discount to the C$29

In a first scenario, let’s assume that in an ideal world 75% of the GBR shareholders accept the cash and 25% accept Kinross stock. In this scenario, everyone goes home happy with either C$29 in cash or the Kinross stock, and every single shareholder will end up with what he wants.

In a second scenario, let’s assume 90% of the shareholders will prefer the cash, and 10% will take the stock. In this scenario, the pro rata clause gets activated.

This basically means that shareholders electing cash will receive the cash portion for 75/90 = 83.3% of their shares, and the stock option for the remaining 16.7% of the shares. Using the closing price on Friday, in this scenario, one would receive 0.833*C$29 in cash and 0.167* C$26.10 in stock for a combined result of C$28.52, pretty close to the closing price of Great Bear on Friday.

To make things absolutely clear, let’s work with numbers.

Someone who owns 1,000 shares of Great Bear will be able to receive the cash offer of C$29 for 833 of those shares and take home C$24,157. The remaining 167 shares will be swapped in the aforementioned 3.8564 ratio into Kinross stock, resulting in a final position of 644 shares of Kinross Gold at a current market value of C$4,4360 for a total of C$28,517.

Conclusion

The statement ‘this is the easiest C$0.50 to make in my life’ is only partially correct. It will be true if a maximum of 75% of the shareholders will elect the cash option. Considering the stock option is trading at a discount of about 10% to the C$29 headline price, we expect the request to be paid out in cash to exceed 75% and as such, the cash payout will be pro-rated.

It’s impossible to predict what the final ratio of cash and stock will be. But just realize the C$29/share in cash will only materialize if 75% of the shares (or less) will be tendered to the cash bid. And that explains why Great Bear is trading at a small discount to the C$29 headline price.

The author has a long position in Great Bear and will tender into the cash offer (or sell on the open market). This is a very fair offer.

Disclosure: The author has a long position in Great Bear Resources. Great Bear is a sponsor of the website. Please read our disclaimer.