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AdvancedBrazilian REITs · Lesson A4.2 · Module A4

Mergers, takeovers and spin-offs: who wins?

Module A4: Events that change the fund

10 slides~4 minquiz at the end

In this lesson

  • Merger, takeover, spin-off and conversion
  • Exchange by book value vs. market, math included
  • What the rules require before the deal
See the slides
Jigsaw puzzle with one piece fitting in

Brazilian REITs · Lesson A4.2

Two funds become one. Who comes out ahead?

In a merger, one calculation decides how many shares you get — and that calculation can move value.

Willi Heidelbach · Wikimedia Commons · CC BY 2.0

The names

Four deals that reshape a fund

  • MergerA and B cease to exist and C is born
  • TakeoverA absorbs B, which ceases to exist
  • Spin-offpart of the fund, or all of it, splits
  • Conversionthe fund changes its nature

All go through a meeting vote with a qualified quorum.

The example

A is taking over B

Fund AFund B
Shares1 million2 million
Book value per shareR$ 100R$ 50
Market priceR$ 100R$ 40
Price-to-book1.00.8

Illustrative funds.

Rule 1 · exchange by book value

B holders gain 25%

R$ 50B book value÷R$ 100A book value=0.5A share per B share
100 B sharesR$ 4,000 on the market×0.5=50 A shares
50 A shares×R$ 100=R$ 5,000+25% for B

Rule 2 · exchange by market price

Nobody gains on the market

R$ 40B price÷R$ 100A price=0.4A share per B share
100 B shares×0.4=40 A shares
40 A shares×R$ 100=R$ 4,000neutral

The rule chosen decides who keeps B's discount.

The safeguards

What the rules require first

  • Properties reappraisedif the last appraisal is over 3 months old
  • Criteria disclosedhow assets were valued and shares allotted
  • Representative's opinionwhere the fund has one
  • Meeting votewith a qualified quorum

CVM Resolution 175, Annex III, arts. 16, 22, 43 and 44.

Remember this

Three takeaways

  1. Mergers aren't neutralThe exchange ratio can shift value from one group of holders to another.
  2. Book value or market?The exchange rule decides who keeps the discount.
  3. Fresh appraisalIf the last one is over 3 months old, properties are reappraised first.

Quick quiz · 1 of 2

In a takeover, the last property appraisal is 5 months old. What do the rules require?

See answer

A new appraisal. After more than 3 months, properties are valued again before the deal (CVM Resolution 175, Annex III, art. 43).

Quick quiz · 2 of 2

B's book value is R$ 80, A's is R$ 100. By book value, 100 B shares become…

See answer

R$ 80 ÷ R$ 100 = 0.8. 100 B shares × 0.8 = 80 A shares.

Lesson complete

Next lesson

A4.3Advanced · Lesson A4.3Liquidation: what happens to your moneyIf the fund ends, you get what the property sales bring in, in installments and with tax withheld.Continue
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Image credits
  • Willi Heidelbach · Wikimedia Commons · CC BY 2.0 — Wikimedia Commons
  • Andrea De Santis · Pexels · Pexels License — Pexels

Educational content, written for learners. Not investment advice.