Use of CDIs in Australian M&A

CDIs have been a popular form of scrip consideration offered by foreign bidders wishing to allow Australian shareholders to continue their investment in the merged entity via an ASX listing, but history shows that the number of CDIs diminishes over time as the underlying shares flow back to the foreign company’s home stock exchange.

In brief

• CDIs are a popular from of consideration in scrip mergers between Australian and foreign companies.
• While they are the economic equivalent of a share, market forces tend to make them less attractive over time, resulting in flowback to the foreign company’s home stock exchange.
• Despite this, they remain a useful M&A tool.

Use of CDIs in Australian M&A

A CDI is a security which is listed on ASX and represents a beneficial interest in a share in a foreign company. They were devised by the ASX because foreign issuers cannot participate in the ASX clearing and settlement systems. CDIs are issued by an ASX entity (which, in turn, holds the underlying share) to overcome the limitation.

A question often comes up about how a board should consider a foreign bid which offers CDIs to Australian shareholders. Will long-term shareholders regard them as the equivalent of holding shares directly? 

In economic terms, they are the equivalent of a direct shareholding. Anyone who can own a share in an Australian company is able to own a CDI. They confer the same rights to information, dividends and voting (albeit via the nominee holder). A CDI holder can requisition a shareholder meeting to the same degree as a direct shareholder (again via the nominee holder). And a CDI can be transmuted into the underlying share at any time on request of the holder. In practice, there is no discernible difference in the traded price of a CDI on the ASX compared to the price of the underlying shares on the overseas exchange. And an Australian shareholder who receives a CDI in consideration for selling a share under a merger can generally claim capital gains roll-over relief.

On that basis, boards of Australian target companies have not, in our experience, discounted the value of the foreign scrip simply because it is in the form of a CDI.

However, it is also the case that, over time, the number of CDIs on issue declines as holders transmute the CDI into a share in order to be able to sell on the overseas exchange, which is typically the major stock exchange for the issuer.

Examples of the decline in CDIs

Here are some statistics for CDIs issued under major transactions in recent years. The decline is usually significant.

This shows a significant decline in the percentage of shares represented by CDIs. This table only shows the starting position as at implementation and the position at the end of August, but, in fact, in every instance (except Amcor), there was a rapid 25% to 50% decline in the first 2 months post-implementation.

This is the inevitable effect of investors seeking to trade their shares on the market which has the most liquidity, namely the foreign exchange. Therefore, one would expect that, over time, the number of CDIs will decline. This is called flowback.

The exception to this is the CDIs in Amcor. But that is a unique case where Amcor was, of course, an Australian company. It sought a listing in NYSE at the same time as undertaking the Bemis acquisition. At that point, CDIs represented 70% of issued shares. For that reason, the weight of trading favoured the ASX with a result that the number of CDIs has remained high. 

The other point to note is that, once the CDI proportion declines, it seems to accelerate. There is a snowballing effect. That means that, at some point in time, maintaining the ASX listing of CDIs is not worth the effort or cost. 

For this reason, CDIs might then be delisted from the ASX. We saw that happen in 2023 for AngloGold Ashanti PLC and Janus Henderson PLC (and many years ago it happened with CDIs issued by Newmont after its Normandy takeover). 

Interestingly, Alcoa said in the Alumina scheme booklet (page 88) that it sees Australia as an attractive capital market and has committed to maintain its CDI listing for at least 10 years. It will be interesting to see if this commitment still makes sense for Alcoa after a few years.

Comment

Despite the flowback issues, directors of Australian target companies should not discount a scrip bid merely because the scrip will be issued in the form of CDIs. There is still an orderly market and long-term investors have a choice if they wish to remain invested in the merged company. They can hold CDIs for the long term and can transmute them into the underlying shares if they ever wish to trade them in the deeper foreign market. In this regard, CDIs are a useful M&A tool.

CDIs have been a worthwhile innovation introduced by the ASX to deal with technical legal issues and no doubt they will continue.