AB-InBev and SABMiller play poker again

Hello, what’s happened to risk? Why should AB-InBev have to compensate SABMiller’s shareholders for the UK’s droopy currency?

For several weeks SABMiller’s shareholders have grumbled that because of the weakening pound they would receive less money in dollar terms for their shares than they originally thought they would. Whereas the pound’s slide has not made much of a difference for British investors in SABMiller, who are now getting a slightly better price for their shares thanks to AB-InBev putting a bit more cash on the table, it has had a much bigger impact on the company’s American and European investors, who had calculated their potential returns using a much better exchange rate when the deal was announced.

When AB-InBev agreed in November 2015 to pay GBP 44 per share, the total price of the deal came to almost USD 108 billion. Since then, though, the British pound has tumbled against the US dollar, largely as a result of Brexit. That meant AB-InBev, which had planned to pay for the deal mostly using debt denominated in dollars, will not have to fork out as much as they thought.

As I see it, luck was on AB-InBev’s side. It was tough on SABMiller’s shareholders, but that’s how it goes on the stock market. Some win, some lose.

But as the takeover has not been wrapped up yet, SABMiller’s shareholders thought they could force AB-InBev to renegotiate the offer. Prompted by some shareholder dissent, SABMiller said it would have to reconsider the attractiveness of the deal in light of the foreign exchange rate changes and SABMiller’s CEO Alan Clark advised the company to temporarily halt the integration process. That’s when AB-InBev felt compelled to slightly increase the offer to GBP 45 per share.

In effect, SABMiller and AB-InBev are back at playing poker and SABMiller know they have AB-InBev in a corner. AB-InBev’s revised offer came just days before the brewer on 29 July 2016 reported a huge drop in second-quarter profit, suffering from a USD 1.8 billion loss tied to the currency hedge. There is no beating about the bush: AB-InBev needs SABMiller badly to return to growth.

Nonetheless, by calling the offer “final”, AB-InBev is prevented from making another offer for six months under the UK’s takeover rules. Will SABMiller risk the bid falling though altogether?

Now the question is: who is more desperate? There is still the possibility that AB-InBev might turn hostile, taking the deal directly to SABMiller’s shareholders. Besides, what would SABMiller gain if it blocked the deal that is already too far along with regard to integration and regulatory approvals?

In reality, though, AB-InBev is still getting a huge discount on the price it initially agreed to pay for SABMiller. Media say that overall, the new offer is worth about USD 103.5 billion - or USD 4.5 billion less than when AB-InBev clinched the deal last autumn.

All things considered, the last week in July proved a troublesome week for AB-InBev. On the positive side, Chinese regulators gave their go-ahead to the merger with SABMiller, while SABMiller’s board on 29 July 2016 unanimously recommended that its shareholders should accept the revised takeover offer.

However, the deal still remains to be voted on by shareholders, which could happen in October or November. This could prove a real hurdle since SABMiller’s board intends to request that shareholders be divided into two classes, with each needing to approve the terms.

There are those shareholders who will receive cash only and those like Altria and the Colombian Santo Domingo family who will receive cash and shares in AB-InBev. The two groups are at odds because the all-cash option is now worth less in dollar terms, while the cash-and-shares option is worth more.

Had these two groups been treated as one, media say, the threshold for consent would have been lower as Altria and Bevco control about 41 percent of SABMiller’s share. In case of a split, three-quarters of both classes of voting shareholders will be needed to pass the deal.

Analysts concur that SABMiller has effectively upped the requirement on backing for the deal to a potential 85 percent. “They appear to be cooperating but they are doing it in a way that is somewhat unhelpful to ABI,” one analyst reportedly said.

The saga continues.