MegaBrew one step closer to completion

The billion dollar question: will AB-InBev pass all regulatory hurdles before 12 August 2016 when SABMiller is scheduled to pay out its final dividend of GBP 0.65 a share totalling roughly USD 1.5 billion? That is on top of the GBP 44 a share AB-InBev is paying SABMiller’s shareholders. If the deal is completed earlier, AB-InBev will pocket the dividend. If not, SABMiller’s present shareholders will.

The South African Competition Commission’s conditional approval of AB-InBev’s acquisition of SABMiller on 31 May 2016 is one important step in this regard. It is expected that the South African Competition Tribunal, which will have the last word on this matter, could have its hearing by mid-June and might be over within a day or two.

If the transaction also receives the go-ahead from China and U.S. authorities (The EU has already conditionally approved of the deal) that might leave AB-InBev and SABMiller with just enough time for the necessary documentation and shareholder meetings to be finalised before 12 August 2016.

In addition to a host of conditions related to the public interest, the South African Competition Commission has obliged AB-InBev to sell SABMiller’s 27 percent stake in South Africa’s wine, cider and spirits producer Distell within three years of the merger’s completion. This stake is currently worth some USD 560 million. Insiders say that AB-InBev had already signalled its willingness to dispose of the stake.

The commission further required that the merged entity provide 10 percent of its refrigeration space in retail outlets and taverns to the beer products of smaller competitors.

Already in April 2016 the South African government and AB-InBev reached an agreement on the approach to public interest issues. The agreement includes the establishment of a ZAR 1 billion (USD 63 million) development fund and a commitment that at no point in the future will there be involuntary job losses in South Africa as a result of the transaction.

Further, AB-InBev has committed to maintain its total permanent employment levels in South Africa for five years.

The only party not happy with the agreement is the Food and Allied Workers Union (Fawu). Apart from job security Fawu is worried about money.

As part of South Africa’s Black Economic Empowerment scheme, SABMiller in 2010 gave shares to its employees. This Zenzele fund holds 18.5 million shares in unlisted SAB, 40 percent of which accrue to SAB employees in South Africa. A large chunk of these employees are Fawu members.

In terms of the original plan, the SAB shares were to be converted into SABMiller shares when the scheme matures in 2020. AB-InBev wants the scheme to continue to maturity and then convert the SAB shares into shares in the AB-InBev/SABMiller merged entity.

However, there is the pending issue of SABMiller’s dividends for the past financial year ended March 2016. Should the deal actually go ahead in July and no dividend is paid to SABMiller’s shareholders, Fawu fears that the Zenzele shareholders will walk away empty-handed whereas SABMiller’s top executives will receive a total payment of USD 2.1 billion in any case. This Fawu considers unfair.

Fawu confirmed that AB-InBev made an offer of some upfront dividend payments and an undertaking that the cashing out price in 2020 would be pegged at a value in line with the GBP 44 offer for SABMiller plus inflation over the period. Fawu has dismissed this as little more than a loan.

As the dispute over the Zenzele scheme was deemed to be a shareholder matter by the commission, Fawu’s fight will not be able to delay the implementation of the merger.

Compared with saving USD 1.5 billion in dividends, the USD 63 million development fund looks like an attractive deal for AB-InBev.

It was reported that the development fund will be used to support smallholder farmers, dependent on SABMiller to purchase their crops, as well as to promote enterprise development. The agreement also includes commitments by AB-InBev to support the participation of South Africa’s craft brewers. In the past the 180 or so South African craft brewers mostly bought their raw materials from SABMiller locally. They now fret that they will be cut off from these supplies.

Incidentally, craft brewers need not worry while farmers might fear plenty. Already, European maltsters are offering malts to South African craft brewers that are cheaper than locally-produced malts.