Megabrew's Mega Headache

AB InBev has room to wait to alter the terms of the deal.

Brexit has thrown an unwelcome wrench into the Megabrew deal. But there's no need to panic just yet.

The pound's 9 percent slide against the euro since Britain voted to leave the European Union has significantly altered the value of the cash and share element of Belgium-based Anheuser-Busch InBev's proposed takeover of London-based SABMiller, compared to the all-cash part of the deal.

The $100 billion transaction has been so long in the making that an impact from Brexit was a natural risk, as my Gadfly colleague Chris Hughes pointed out.

The currency shift has made the cash and share element worth around 50 pounds per SABMiller share, compared with the all-cash offer of 44 pounds a share. When the deal was originally announced in November, the cash and share option was valued at a discount.

Megabrew's Shifting Deal Values

Rising Anheuser-Busch shares, weaker pound have driven the part-share offer well ahead of the £44/share cash offer

Source: Bloomberg

Per-share value = (Anheuser-Busch InBev share * 0.483969 * EUR/GBP rate) + £3.7788

The arrangement was devised to improve the deal's tax efficiency for SABMiller's two biggest shareholders, U.S. tobacco giant Altria and Colombia's Santo Domingo family through its Bevco holding company. Other institutions were unlikely to be drawn to the cash and share offer, because the new securities will be locked up for five years.

But hedge funds and some institutional investors have nevertheless noticed the difference, and are gunning for change, as Bloomberg News has reported. While this is not ideal, and could create pressure at SABMiller's annual meeting on Thursday, neither it nor AB InBev need to take immediate action.

Megabrew's particularly drawn-out progress still needs regulatory approvals, and so has not yet reached the point where AB InBev needs to make a formal offer for SABMiller to recommend. 

There's scope for the situation to change between now and then, not least because of potential sterling volatility. One item on the calendar is the Bank of England's Aug. 4 policy decision, and the potential for new measures to spark a revaluation of the currency -- if the pound were to weaken, the discrepancy may become even more acute. So the companies may as well wait.

Leaving these unknowns aside, there are two main options.

The first is to do nothing, and bet that enough shareholders will still vote through the scheme of arrangement with the discrepancies in the two offers. AB InBev already has irrevocable undertakings from Altria and Bevco amounting to 40 percent of the value of outstanding shares.

SABMiller Gets Ready for Currency Benefit

Weaker pound will boost the value of profits repatriated to Britain

Source: Bloomberg

While the hurdle rate is 75 percent, it's not an outlandish bet. The lockup provisions really are a significant deterrent for most investors, who may not be too bothered about the shifting dynamics of the deal. So this may be a risk worth taking. 

The other main option is for AB InBev to raise the all-cash element of the bid. This isn't a clean solution, as Altria and Bevco would have to grant their approval.

Assuming they can be persuaded, AB InBev does have the wiggle room to raise the cash offer. Analysts at UBS estimate that an increase of between 5 percent and 15 percent wouldn't damage the economics of the deal too much.

Indeed, a 50 pounds-per-share offer looks like it would still be accretive to AB InBev earnings, according to Bloomberg calculations.

There's also the possibility that a higher cash offer would bring AB InBev's share price down. While digging up extra cash for the deal would be unwelcome, any subsequent drop in the shares could also bring in a bit of extra balance between the two sides of the offer. That suggests there are limits to the extra amount needed to keep institutional investors happy.

Pinpointing that sweet spot would make Megabrew's deliberations even harder. But it is also a reason why SABMiller and AB InBev don't need to take swift action.

--With assistance from Brooke Sutherland in New York


This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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