For ASX investors, the sudden arrival of an unexpected takeover bid can be an unpleasant shock or a welcome relief, depending on the circumstances.

Takeover bids come in many forms, and it can be daunting to assess whether you’re getting true value for money for your shares when the dust settles, and the deal is done.

Already this year, ASX-listers Healius (HLS), Newcrest Mining (NCM) and InvoCare (IVC) have all received takeover offers, which have since all been assessed by Morningstar analysts to determine whether they provide adequate value for investors.

We’ve compared all three of these proposed offers to show how Morningstar analysts distinguish a good deal from a bad one.

All-cash offers


For all-cash deals, investors are asked to consider a dollar-per-share buyout offer for the shares they hold.

This is, in many ways, the simplest kind of takeover bid for an investor to assess, the bid asks investors to consider whether their shares are worth the cash-amount offered.

In valuing a cash bid, analysts will compare the dollar amount offered against the target company’s prospects and past performance, not simply its current share price.

Morningstar’s 'fair value estimate' for a company can help investors tell what the long-term intrinsic value of a stock is, helping them see beyond the present market price, and allowing them to consider it against the value of a potential buyout offer.

In TPG Global’s all-cash takeover bid for deathcare provider InvoCare (IVC), shareholders have been offered $12.65 per share, which at the time of the offer marked a 41% premium to the market price of InvoCare shares.

But while that offer may appear high compared to InvoCare’s recent share price, Morningstar analyst Angus Hewitt says the bid is too cheap and undervalues the company compared to Morningstar’s fair value estimate and the company’s pre-pandemic trading levels.

The graph below shows how TPG’s cash-offer compares to Morningstar’s fair value estimate and InvoCare’s share price in the last few years.

“We think TPG is looking to capitalise on share price weakness following a relatively disappointing 2022,” Hewitt says.

With that in mind, Hewitt says the deal is unlikely to go through unless a price more in-line with InvoCare’s performance history and prospects is brought forward.

All-scrip deals


In place of cash, a 'scrip' bid offers to trade an investor’s existing shares in a company for a pre-determined number of the shares in the resulting combined company. Shares can be offered partly or wholly in place of cash. 

All-scrip offers require investors to assess the intrinsic value of the shares they would receive and their resulting stake in the combined company, as well as the value of their current investment.

In the case of medical services provider Healius (HLS), a takeover bid from smaller ASX rival Australian Clinical Labs (ACL) earlier this year would see Healius investors receive 0.74 of an ACL share for each Healius share they own.

Based on ACL’s recent trading price the deal values Healius shares at around $2.66 a piece - offering no premium to the existing share price and a 25% discount to Morningstar’s $3.55 fair value estimate for Healius shares.

As a result, Morningstar analyst Shane Ponraj says the deal isn’t attractive Healius investors.

“Healius' board is yet to evaluate the offer, but we expect it will likely reject or negotiate the proposal in the absence of a higher interloping bid,” he says.

Unlike in cash offers, the value of share-for-share deals can fluctuate depending on the share price of the company offering the deal.

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 and demonstrates the added level of complexity scrip-deals present investors.

The theoretical value of the proposed offer has consistently fallen below Healius’ share price and Morningstar’s fair value estimate, and Ponraj says the offer materially undervalues Healius’ prospects.

“Although Healius has thus far managed the transition away from pandemic testing more poorly than competitors, it remains well-placed to benefit from operating leverage as activity levels recover in its base businesses, with margins also supported by its cost initiatives.”

Foreign scrip deals and other considerations


Another all-scrip deal making headlines this year is the potential takeover of ASX-listed gold miner Newcrest (NCM) by industry giant Newmont (NEM).

After the Newcrest board rejected Newmont’s original offer, a new “best and final offer” would exchange each Newcrest share for 0.4 of a Newmont share.

While Newmont has flagged listing on the ASX following the deal, its shares currently trade in the US meaning the deal’s value is tied to fluctuations in the US-AUD exchange rate as well as changes in Newmont’s share price.

Taking these factors into account, at the time of the final offer the deal amounted to around $30.96 per Newcrest share.

However, Morningstar analyst Jon Mills notes that under the new deal, Newmont will allow Newcrest to pay a further fully franked special dividend of up to about $1.67 (US$1.10), without reducing its offer, taking the total value of the deal to $32.63 per share.

The graph below displays the theoretical value of the deal over the last few months, factoring in a fully paid dividend, changes in the US-AUD exchange rate and changes in Newmont’s share price.

At $32.63 per share, the bid’s value represents a 5% premium to Morningstar’s previous fair value estimate of $31.00—an attractive offer, according to Mills.

“In our view the higher proposal 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 along with its extensive growth pipeline.”

“We’ve recently initiated coverage of Newmont, which is trading below our fair value estimate [...] We think if a deal did go forward, Newcrest investors would be getting good value,” he added.