Shares of Sirius Resources N.L. (ASX: SIR) skyrocketed more than 21% during today's session to trade at $3.94, making it the strongest-performing stock from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) group for the day following a takeover bid from rival Independence Group NL (ASX: IGO).
However, investors might be wondering why it didn't climb even higher.
After all, the takeover bid lodged by Independence Group valued the stock at $4.38 (a 35% premium to Friday's closing price), and that wasn't even including the value that would be recognised by Sirius' shareholders from the formation of a new entity, to be known as S2 Resources Ltd.
Sometimes, a takeover target mightn't climb to the price set by the acquirer if the market is lacking confidence that the transaction will actually proceed, but that wasn't the case with Sirius Resources.
Instead, the stock was trading below the takeover offer price due to that fact that the offer was predominantly scrip-based. While Sirius shareholders would receive 52 cents per share should the takeover receive approval, they will also receive 0.66 shares in Independence Group for every Sirius share held. That means that the total value of the transaction will largely depend on the value of Independence Group's shares when/if the transaction actually takes place.
During the session, Independence Group's shares actually fell by nearly 12%, falling to $5.15 per unit. In other words, the Independence Group securities that Sirius Resources' shareholders will receive are worth less today than they were when the takeover offer was lodged, meaning that (at today's prices), the total transaction value is now less than $4.38. This would explain why Sirius' shares are hovering significantly below that price.
Although the deal will likely create synergies for both miners, it's possible that Independence Group investors are worried about the price being paid for Sirius as well as the dilution effect it will have on current investors' ownership. In addition, they may be disappointed that Sirius' 'Baloo' gold prospect will not be included in the transaction, but will instead be distributed to Sirius shareholders as part of the newly formed S2 Resources entity.
