Pricing it right in public M&A: contingent consideration and downside price protection

Risk allocation in Australian public M&A is a constant tension in transactions - bidders seek to shield themselves from future performance risks, while targets are reluctant to sacrifice upside in deals struck at lower valuations. Collar-led scrip consideration and contingent value rights (CVRs) offer potential solutions to these standoffs. Both are well-established in the United States but remain underutilised in Australia.  In this article we explore how these structures work and the key considerations for M&A practitioners.

In a scrip deal, consideration is typically based on a fixed exchange ratio, with target shareholders receiving a set number of bidder shares per target share held. This creates two well-known risks: if the bidder's share price falls between signing and completion, target shareholders bear the downside; and if the bidder's share price rises, the bidder effectively pays a higher price-per target share than originally negotiated.

A collar structure allocates that risk between the parties within agreed parameters. There are two key variants:

• Fixed price collars - this is the more common form. The economic value of the bidder shares is fixed within an agreed range, usually measured by the volume weighted average price (VWAP) of bidder shares over a defined period. If the bidder's share price is within this range at completion, the exchange ratio adjusts to deliver the agreed economic value (ie. a dollar value dividend by a VWAP of bidder shares). If the bidder's share price falls above or below the agreed range, the consideration reverts to a fixed exchange ratio on either side of the collar, providing certainty of value within the collar and certainty of quantity outside it.
• Fixed exchange ratio collars under which the number of bidder shares per target share is fixed, but the value fluctuates based on the bidder share price. If the bidder share price falls outside the agreed collar, the consideration is based on a fixed price on either side of the collar range, creating an ultimate cap and floor to the consideration.

The contested bid for Warner Bros Discovery (WBD) provides a recent, high-profile illustration. Netflix initially offered US$27.75 per WBD share (approximately US$72 billion in equity value), with each WBD shareholder receiving US$23.25 in cash plus Netflix shares worth US$4.50, subject to a collar around Netflix's 15-day VWAP (this was subsequently changed to an all cash offer).

Under the original terms of the cash/scrip offer, if Netflix's VWAP fell between US$97.91 and US$119.67, the scrip component was sized to deliver US$4.50 of value, preserving price certainty for target shareholders. Below US$97.91, target shareholders would have received a fixed exchange ratio of 0.0460 Netflix shares per WBD share, limiting Netflix's dilution risk but exposing WBD shareholders to downside beyond that point. Above US$119.67, target shareholders would have received a fixed exchange ratio of 0.0376 Netflix shares, allowing WBD shareholders to participate in some upside while protecting Netflix shareholders from overpaying in value terms.

At the time of publication of this article, Netflix had bowed out of the process, with Paramount Skydance poised to acquire WBD for US$31 cash per WBD share. 

In advising on collar structures, the leverage lies in four key areas:

• Fixed price vs fixed exchange ratioThis is the structural starting point and reflects risk allocation. Bidders often prefer a fixed price where control over dilution is critical. By contrast, a fixed exchange ratio appeals to a target when locking in an absolute value floor is the priority.
• Collar bandwidthThe VWAP range is typically the most commercially sensitive term. It determines how much volatility each side is willing to absorb. The longer the gap between signing and completion (particularly where regulatory approvals are involved) the stronger the case for a wider band.
• Cap and floor outside the bandWhat happens beyond the collar is where economic risk crystallises. The mechanics here dictate how much downside target shareholders bear, and how much upside they surrender.
• Termination rightsSome structures extend to giving the target a right to walk away if the bidder’s share price falls below an agreed threshold, either immediately or after a cure period. While not universal, these provisions can materially shift negotiating dynamics.Key negotiation pressure points in collar structures
• In advising on collar structures, the leverage lies in four key areas:
• Fixed price vs fixed exchange ratioThis is the structural starting point and reflects risk allocation. Bidders often prefer a fixed price where control over dilution is critical. By contrast, a fixed exchange ratio appeals to a target when locking in an absolute value floor is the priority.
• Collar bandwidthThe VWAP range is typically the most commercially sensitive term. It determines how much volatility each side is willing to absorb. The longer the gap between signing and completion (particularly where regulatory approvals are involved) the stronger the case for a wider band.
• Cap and floor outside the bandWhat happens beyond the collar is where economic risk crystallises. The mechanics here dictate how much downside target shareholders bear, and how much upside they surrender.
• Termination rightsSome structures extend to giving the target a right to walk away if the bidder’s share price falls below an agreed threshold, either immediately or after a cure period. While not universal, these provisions can materially shift negotiating dynamics.

Collars remain rare in Australian public M&A. The market prizes certainty. Target boards want to articulate a clear, simple value proposition to shareholders. There is also a lingering, if largely untested, concern that courts approving a scheme may scrutinise collar mechanics more closely when assessing whether the deal is ‘fair and reasonable’.

That means both the structure and disclosure are important. The collar must be carefully explained in the scheme booklet, the headline consideration thoughtfully framed, and the overall presentation robust - particularly given ASIC review. Traditionally, Australian public M&A deals have managed market risk through narrower tools, such as MAC clauses and limited market-based walk-away triggers.  But that orthodoxy may be leaving value on the table or limiting the ability to find solutions to value gaps.

A well-designed collar in a scrip deal is a precise solution to market risk. It bridges valuation gaps without heavy pre-hedging, reduces the likelihood of re-trading if the bidder’s share price shifts between signing and completion and provides a structured mechanism to absorb volatility that might otherwise derail negotiations.

It also reduces reliance on blunt MAC provisions, and the disputes that can follow. By delivering calibrated certainty around consideration, a collar can strengthen a target board’s recommendation while preserving upside participation.

Used thoughtfully, a collar is not complexity for its own sake. It is disciplined risk allocation.

A contingent value right, or CVR, is essentially an instrument committing a bidder to pay additional consideration to target shareholders on the occurrence of specific triggers. CVRs can bridge valuation gaps related to uncertain future events that would impact the target company's value.

Their use in US public M&A has surged - in 2025, there were 27 transactions involving a CVR, compared to only 7, 18 and 9 completed CVR transactions in 2024, 2023 and 2022, respectively.[1] In Australia, awareness and attention to these structures is also increasing.

CVRs in the US have evolved into highly customised instruments, but they generally fall into two main categories: event-driven CVRs and price-protection CVRs.

Event-driven CVRs involve payment of additional cash to target shareholders on the occurrence of a specified event, such as FDA/TGA approval for a pharmaceutical company. Australian examples include the Next Capital-led consortium's proposed acquisition of Silver Chef in 2019 (where target shareholders were entitled to a contingent value note calculated by reference to a part of the target's business in run-off) and the Macquarie proposed acquisition of Central Petroleum in 2017 (target shareholders were entitled to a contingent value note payable if certain exploration resources were identified within four years).

Price-protection CVRs are used in scrip transactions to protect target shareholders against falls in the bidder's share price in the period after completion. Typically, these CVRs have a maturity of one to three years, at which point the holder receives a payment of either cash or securities if the market price of the bidder's shares is below a target price. They also typically include a floor price which caps the potential payout, functioning effectively as a collar.

Australian examples include the Yancoal acquisition of Gloucester Coal in 2011, where Yancoal issued ASX-quoted redeemable preference shares providing protection against falls in Yancoal's share price, with a right to additional scrip or cash consideration (up to A$3.00) if the market price dipped below A$6.96 within 18 months of implementation. Almost all Gloucester Coal shareholders elected for the additional CVR share alternative. The Wesfarmers acquisition of Coles Group in 2007 is another example, where Wesfarmers issued ASX-quoted ‘partially protected shares’ providing downside protection if the two-month VWAP fell below $45.

CVRs offer several compelling advantages in public M&A including:

• bridging valuation gaps;
• increasing deal certainty;
• providing downside protection; and
• lowering up-front financing costs.

Despite their advantages, CVRs carry risks, including:

• complexity;
• the potential for dispute;
• contractual restrictions on the bidder;
• illiquidity of the CVR security;
• arbitrage risks; and
• exposure to credit and performance risks for target shareholders.

Collar structures, such as the initial proposal in the Netflix/Warner Bros deal, and CVRs each offer targeted solutions to one of the key challenges in Australian public M&A - effectively allocating risk and bridging valuation gaps while preserving the certainty of deal execution.

For dealmakers, the key task lies in calibrating these instruments to balance the protection of target shareholders’ interests with the flexibility required by bidders, all while navigating the regulatory and disclosure obligations imposed under the Australian takeovers regime.