Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

AB InBev is $9 billion down, so far, on a currency hedge the brewer arranged for its 79 billion-pound ($105 billion) takeover of rival SABMiller. But it won't be drowning its sorrows.

That value, lost as the pound sank after the Brexit vote, is being paid away to banks and hedge funds in the foreign exchange markets. Add it to InBev's advisory and financing fees, and the bidder's total costs for the deal will hit $11 billion.

Cost of Certainty
Megabrew's advisory fees are dwarfed by the cost of the currency hedge
Source: Bloomberg

The financial world is therefore emerging as the biggest winner from the proposed tie-up rather than SAB's shareholders. The U.K. brewer's investors have borne the cost of the hedge as much as InBev itself.

The hedge guaranteed that InBev, which reports in dollars, would pay $1.53 for each pound in the original 46 billion-pound cash portion of its offer for SAB.

Losing Fizz
The pound tumbled after June's Brexit referendum
Source: Bloomberg

Sterling's fall to $1.33 has plunged the value of that contract into the red. Had the pound jumped -- say on a vote to remain in the European Union -- the hedge would have generated a gain for the Belgian brewer.

According to InBev's prospectus for the deal, the various derivative contracts behind the hedge have led to a cumulative hit of $3.1 billion on the income statement and $5.9 billion on the balance sheet.

Brexit was a foreseeable risk back in November when this deal was hatched. But for InBev, fixing the sterling exchange rate wasn't a dumb move: it removed a big element of uncertainty in a complex transaction that was always going to take months to get to the finishing line.

What's more, InBev would probably have lost this money anyway.

Imagine if InBev hadn't paid away the benefits of sterling's fall to the currency market. SAB would have then had more ammunition to wring a better price from its suitor. It could have argued, reasonably, that the original 44 pounds-a-share offer price undervalued its mostly non-sterling profits and that InBev could have easily afforded to pay more.

As it was, InBev pre-empted any such negotiation, bumped up its offer by a measly pound a share and said take it or leave it. SAB chose to accept it, rather than unpick all the joint work that had already been done on the combination.

Sterling is 3 percent up from its recent lows. Who knows where it will be in a year’s time. For other bidders involved in cross-border deals, InBev’s pain from its currency hedge won't be a deterrent to doing something similar. And sometimes, constraints can be valuable.

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

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net