AB InBev Stock Rally Complicates Deal for SABMiller Holders

  • Value of cash, stock alternative on verge of topping cash bid
  • Altria, BevCo may end up with premium for their shares

Anheuser-Busch InBev NV crafted its bid for SABMiller Plc to ensure the target’s two largest shareholders got a lower price for their shares than other investors, as part of a plan to cut their tax bill. Instead, they’re on track to receive a premium.

Under the terms of AB InBev’s bid, SABMiller shareholders can choose 44 pounds a share in cash or a mix of cash and stock that was valued at just over 39 pounds a share when the terms were announced Oct. 13. Because AB InBev’s stock has gained 17 percent to 117 euros since the agreement, the value of the share alternative has jumped to about 43.53 pounds per SABMiller share, nearly eliminating the discount to the cash offer.

The shares that will be issued won’t be listed on any exchange for five years, and can’t be traded or transferred until that period is up. By pricing the partial share alternative at a discount, and locking up the stock, the goal was to make that proposal unattractive to all but big shareholders Altria Group Inc. and BevCo Ltd., which want to avoid paying the capital gains tax that would come with accepting all cash.

AB InBev is willing to issue 326 million shares, enough to cover the demand from Altria and BevCo, but not much more. The higher AB InBev’s stock goes, the more alluring the cash-and-stock offer becomes to other shareholders.

“If the share price continues to increase and the spread widens, we could start to expect more pressure from certain shareholders and potentially activists to ask for shares, but the five-year lockup would still be an issue,” Jean-Francois Comte, co-founder of the risk arbitrage fund manager Lutetia Capital, said by phone.

Eamonn Ferry, an analyst at Exane BNP Paribas, has forecast AB InBev stock may reach 136 euros in the next year.

Altria and BevCo, which own about 40.4 percent of SABMiller, have committed to accepting the partial share alternative. AB InBev Chief Executive Officer Carlos Brito said on a conference call with reporters last month that the alternative had been designed with and for SABMiller’s largest shareholders. BevCo is a holding company for Colombia’s billionaire Santo Domingo family. AB InBev predicts the transaction will be completed in the second half of 2016.

The lockup is too long for many fund managers, who can’t predict outflows in the assets they manage on behalf of investors.

“I personally would be happy with holding the partial share alternative in my private account, but most if not all institutional investors can’t go for that option,” said Thorsten Winkelmann, a money manager at Allianz Global Investors. “You might run into the troubles of having too high exposure to one specific name in the case that heavy outflows occur.”

‘Limited Audience’

The companies could modify the takeover agreement to restore the discount by raising the all-cash offer, lowering the cash portion of the cash-and-stock alternative, or both, Jonathan Fyfe, an analyst at Mirabaud, said in a Nov. 9 report.

“I think that five-year lockup really is going to keep most folks” from taking the partial share alternative, Sarah Knakmuhs, an Altria spokeswoman, said by phone. An AB InBev spokeswoman said shareholders “should focus on the cash offer.” A spokesman for SABMiller declined to comment, while BevCo didn’t immediately respond to requests for comment.

The cash-and-stock option “plays to a limited audience but as it gets tested by ever higher gains on AB InBev shares, we’ll find out whether the audience is as limited as I suggest,” Tom Russo, who manages $10 billion for Gardner Russo & Gardner including about $1 billion of shares in AB InBev and SABMiller, said by phone. “Individuals who are capable of holding shares in the lockup will certainly become more interested as the price of the partial share alternative becomes more of a premium to the cash offer.”

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