SAB shares retain discount to agreed deal

<p>Updated 1730 BST   SABMiller probably has just a fortnight left in control of its own destiny. The main uncertainties remaining are regulatory.   (FINAL?) […]</p>

Updated 1730 BST

 

SABMiller probably has just a fortnight left in control of its own destiny.

The main uncertainties remaining are regulatory.

 

(FINAL?) DEAL BASICS

  • The world’s beer No.2 on Tuesday capitulated “in principle” to takeover by No.1, Anheuser-Busch InBev
  • ABI’s fifth ‘informal offer’ is £44.50/share
  • 4 earlier offers/share—£38, £40 and £42.15, 43.50 were rejected
  • Deadline for a ‘firm bid’ (under UK rules) is now 28th October (it was originally 14th October)

 

SAB caved, biggest holdouts on board

The UK/South African firm insisted right up till Monday night that ABI’s offers “substantially” undervalued it.

At the heart of its independence ‘bid’ was an earlier-than-scheduled trading update last week.

The subtext was that SAB didn’t need ABI because it was growing faster-than-expected widely appreciated and was planning cost cuts.

But there was little doubt SAB was offering ‘jam tomorrow’ compared with ABI’s ‘jam today’.

In the event, SAB’s resolve was worth a £3bn uptick from the $103bn offer on Monday to $106bn on Tuesday.

That’s a clean 50% premium to SAB’s 14th September close, from Monday’s 48% premium.

The “unanimous” agreement logically includes SAB’s biggest shareholders .

  • Tobacco group Altria, which owns about 27%
  • Santo Domingo family of Colombia, which owns about 14% via BevCo

 

 

Colombians and Big Tobacco in for less?

AB InBev’s offer to the biggest hitters was and remains a cheaper mix of cash and shares.

That’s to save them from a huge tax bill following an all-cash deal.

The mixed deal is now worth £39.03 up from £38.88/share, about 11% less than the main offer (from an 8.5% discount on the previous terms).

The ‘mixed’ premium to SAB’s ‘undisturbed’ price/share remains 33%.

The cash part of the mix was hiked on Tuesday to £3.77/share from £3.56 on Monday.

Despite this sop, the mixed deal is still weaker, and it’s meant to be.

The cash-and-share offer was designed to be unattractive enough to push most institutional shareholders toward the main offer, but with Altria and BevCo in mind.

With unanimous SAB board approval reported on Tuesday, Altria and the Santo Domingos—all represented—are in.

However, which exact deal the big holders would accept is not entirely clear.

 

 

Stubborn discount

SAB’s 9% jump on Tuesday took it to 3960p at the time of writing, meaning the stock remained at a discount to the main £44/share offer.

The shortfall reflects remaining uncertainties.

For one thing, multiples implied by the apparently winning deal ought to give all shareholders pause for thought.

Synergies will obviously be pressured by the bigger pay-out upfront.

In dollar terms, the buffed-up deal is about $33bn, more than twice the amount of directly discernible synergies.

On the other side, the deal is now 15.4 times the amount of SAB’s $7.7bn 2014 Ebitda and net debt of $12.5bn.

Even if cost cutting is ratcheted up by a higher factor to maintain savings–and ABI has demonstrated its finesse at this–the door to even higher offers has surely closed.

That narrows the margin for error, in case of further delays and reduces financial leeway, should that prove necessary.

 

Watchdogs barked on Tuesday

Beyond the above, antitrust approvals are the biggest likely sticking point, and in the US, getting them could yet be ‘make or break.’

AB InBev has circa 45% market share Stateside.

SABMiller controls 25% via MillerCoors LLC, a joint venture with Molson Coors.

Probability that the new group would have to exit the JV looks to be above 50%.

AB InBev was forced to severely downsize its $20.1bn acquisition of Mexico’s Grupo Modelo SAB in 2013 after the Justice Department sued.

 

But an additional US legal thread opened on Tuesday morning.

There were reports that the US Justice Department was investigating allegations that Anheuser-Busch InBev sought to curb competition in the beer market by buying distributors.

The allegation is that fast-growing ‘craft’ brewers are finding it more difficult to get their products on store shelves after ABI took over distribution locally.

As we mentioned at the outset of this potential deal, whilst volumes for big brand beers are slipping, those for emergent craft beers are surging.

ABI said later on Tuesday that the Justice Dept. and California Attorney General had questioned its pending acquisitions of two California distributors.

The company said it would continue to distribute “several craft” brands via the distributors and was “working cooperatively to address questions”.

 

 

Coke Control

Elsewhere on the distribution front, SAB and ABI deals with Coca-Cola and PepsiCo respectively could also be in the antitrust frame.

Plus, SABMiller has disclosed that a change of control would give Coke “certain rights” under its bottling agreements.

AB InBev’s PepsiCo agreements are set to expire at the end of 2017.

They would normally be automatically extended for 10 years unless either company gives written notice at least two years before they expire.

As for China, where AB InBev had 14% market share last year authorities could demand SAB exit its joint venture with China Resources Enterprise Ltd.

The JV controls 23% of China’s market and produces the top-selling Snow beer.

 

African prize

Left field (and relatively moderate) risks also emerged in South Africa on Tuesday.

South Africa’s National Treasury said it would need to assess tax implications and might “in the extreme” try to block the takeover.

Additionally, South Africa’s Food and Allied Workers Union said it would oppose it due to concerns about job losses.

Africa is an important focus and motivator of the deal for ABI, because at present, the Belgo-US company has little presence there.

Also, demographic trends will soon make the entire region key in global beer consumption as the legal-age drinking population rises, together with a growing middle class.

 

 

 

 

 

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