What it means
The most common use is in lending, where a takeout is the long-term financing that pays off a short-term loan. For example, a mortgage that replaces a construction loan is called a takeout loan.
The lender who provides it is said to take out the earlier lender, which means the first lender receives its money back in full. In mergers, a takeout is a bid for a company by a buyer who wants to acquire it completely.
The word suggests removing the company as an independent business, often by purchasing all of its shares. A takeout offer is typically priced above the market price to persuade shareholders to sell.
In trading, to take out an offer means to buy all the shares or bonds available at the lowest asking price, and sometimes to move up through higher prices. It signals strong demand, and the price often rises as a result, since the next buyer has to pay more to find a seller.
Traders also use the phrase to mean closing out or removing a competitor's resting order from the market. Each use has the same underlying picture: one thing is removed and replaced by another, or one party removes another from the scene.
The lender is replaced, the owner is replaced, or the seller's stock is cleared away. Keeping that picture in mind helps decode the term.
In a document or a conversation, it is worth asking which of these meanings is intended before relying on the word. The cost of getting it wrong can be large, because a lending takeout involves a repayment deadline while a company takeout involves a change of ownership.
Finance teams meet the term mostly in project finance and property. The practical question is whether the long-term lender or buyer has made a firm commitment, because a plan to be taken out is not the same as an agreement.
In practice
Real-world examples.
Example
A developer finishes a warehouse financed by a one-year bridging loan. A pension fund provides a 20-year takeout loan that repays the bridge in full. The developer now has stable, long-term debt with predictable payments.
Example
A private equity group (investors who buy companies using pooled funds) announces a takeout of a listed packaging company at a 30% premium. The board recommends the deal and shareholders vote to accept. The company is delisted once the purchase completes.
Example
A bond trader sees an investor ask for a large block of corporate bonds offered at 98. The trader takes out the entire offer, buying every bond available at that price. The price moves up because no sellers remain at 98.
Formula
Calculation
Takeout premium = (offer price - market price) / market price x 100
A listed company's shares trade at $20.00 and a buyer announces a takeout offer of $25.00 a share. The premium is (25.00 - 20.00) / 20.00 = 5.00 / 20.00 = 0.25, or 25%. With 4,000,000 shares in issue, the total cost of buying all of the equity is 25.00 x 4,000,000 = $100,000,000, compared with a market value of 20.00 x 4,000,000 = $80,000,000 before the offer.Case study
Seen in the real world.
Redstone Logistics is an illustrative, fictional freight company that borrowed $3,000,000 on a 12-month bridging loan to buy trucks. The loan was expensive, with interest at 9%, and the company planned to replace it with cheaper long-term financing.
A bank offered a takeout loan of $3,000,000 at 6% over seven years, which would cut annual interest from $270,000 to $180,000. The offer was subject to a satisfactory audit of the company's accounts, which took longer than expected.
The illustrative lesson was that the bridging loan nearly expired before the takeout was confirmed, and that the cheaper rate on offer was worth little until the paperwork was signed. Redstone had to pay a $30,000 extension fee, and the finance director now requires a signed commitment before any bridging loan is agreed.
Watch out
Common mistakes.
- Assuming a takeout will happen because it has been discussed, when only a signed commitment makes it reliable.
- Mixing up the lending meaning with the company-buyout meaning, which leads to confusion in meetings.
- Treating a takeout bid as the final price, when boards often negotiate for a higher figure or a rival buyer may appear with a better offer.
Questions
People also ask.
What is a takeout loan?
It is a long-term loan that pays off a short-term loan, such as a construction or bridging loan.
Is a takeout the same as a takeover?
In company deals the two are close, but takeout often emphasises removing the target from the market entirely, while takeover covers any change of control.
Why do buyers pay a premium in a takeout?
The premium persuades existing shareholders to give up their shares and compensates them for losing future growth.
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