What Is a Contingent Value Right (CVR)?
Shareholders of a company facing a restructuring or a buyout may often receive contingent value rights (CVRs). These rights ensure that the shareholders get certain benefits if a specific event occurs, usually within a specified time frame. These rights are similar to options because they frequently have an expiration date, beyond which the rights to the additional benefits will not apply. CVRs are usually related to the performance of a company's stock.
- The shareholders of a company being acquired may receive contingent value rights (CVRs).
- CVRs stipulate that a shareholder will receive certain benefits if a specific performance event is met in a specific time frame.
- The benefits typically include a monetary benefit, such as additional stock or a cash payout.
- CVRs are like unsecured obligations in that there is no collateral backing them nor is the payout guaranteed.
- There are two types of CVRs; non-transferable and transferable. Transferable CVRs are listed on an exchange.
Understanding a Contingent Value Right (CVR)
A contingent value right (CVR) is tied to a theorized future event. If the event in question materializes in the given time frame, then holders of the CVR will receive a specific benefit, which is usually some sort of monetary gain. If the event does not occur, then the CVR will expire worthless.
CVRs arise when there is a discrepancy in the value of the company being acquired. The acquiring company may see a limited amount of value but higher possible future value, whereas the company being acquired values itself higher; perhaps based on certain technology in development or a new product coming to market. CVRs usually help bridge the gap between this difference in valuation. An acquiring company can pay less upfront for the acquired company but if the acquired company hits certain performance targets in the future, then its shareholders will receive additional benefits.
CVRs may allow shareholders to gain additional shares of the acquiring company or they might provide a cash payment. Oftentimes this is linked to if the acquired company's share price drops below a certain price by a predetermined date.
CVRs come with some risks in that at the time of issuance, their real value is not discernible. The risk that shareholders face remains unknown because the rights are based entirely on the anticipated price of the stock or some unforeseeable occurrence. When contingent value rights are issued, a portion of the risk that would typically be assumed by the acquirer is transferred to the shareholders of the company being acquired. Depending on the price paid to acquire the company, this could have an adverse effect on the existing shareholders.
Types of Contingent Value Rights (CVRs)
Contingent value rights can be offered in two ways: traded on a stock exchange or non-transferable. CVRs that are traded on a stock exchange can be bought by anyone; they do not have to be current shareholders of the acquired company. An investor can buy a CVR on an exchange up until it expires. Non-transferable CVRs apply only to current shareholders of the acquired company and are distributed at the time of the merger. Companies prefer non-transferable CVRs as transferable CVRs listed on an exchange require regulatory work and incur higher costs
Contingent Value Rights (CVRs) as Unsecured Obligations
The New York Stock Exchange (NYSE) Listed Company Manual refers to CVRs as "unsecured obligations of the issuer." An unsecured obligation, also known as unsecured debt, carries no collateral or backing by an underlying asset. Congruent with this, shareholders do not have a guaranteed right that the "reward" will be granted to them.
So, while they hold an obligation from a company, investors who receive CVRs are more akin to options holders than to, say, bondholders—unlike the latter, they have no guarantee to be paid, and no claim on the company's assets should their payment not materialize.
Also like options, all CVRs have an expiration date. Should the required event not happen within the specified period, shareholders holding a CVR receive no additional benefit other than those that the stock itself offers.
Real World Example
In May 2015, common stock shareholders of Safeway Inc. received CVRs as a result of the merger of Safeway into a wholly owned subsidiary of Albertsons Companies that year. They were issued in connection to the sale of Property Development Centers, Safeway's real estate subsidiary, back in 2014. Safeway's shareholders had been promised CVRs on that deal at the time. The first distribution of $0.17 per CVR occurred in May 2017. Nearly a year later, in April 2018, Albertsons made its final distribution of $0.00268 cash per CVR related to the sale of the Property Development Centers' assets.
The former shareholders of Safeway stock reaped another payout from additional CVRs, this one based on the sale of Safeway's stake in a Mexican retailer, Casa Ley. They did better on this deal, receiving $0.93 per CVR in February 2018. CVRs allowed Safeway's stockholders to share in the proceeds from the selloff of the assets of their old company.