The stakes in the battle between two of the world’s largest brewers were raised this week after Anheuser-Busch InBev made its third proposed offer for SABMiller public.
Although the majority of the SABMiller board quickly rejected it, the game is far from over because shareholders now have sight of what is on the table. It was not rejected by representatives of tobacco giant Altria, with a 27% stake in the brewer, which has declared its support for the proposal.
It appears that SABMiller’s second largest investor, the Santo Domingo family, which owns about 14% through its holding company BevCo, will be the kingmakers in this battle, as one analyst put it.
The proposal by Belgian-based AB InBev, the third after two private offers put to SABMiller’s board, incorporated a cash offer to shareholders of £42.15 a share as well as a partial share alternative for roughly 41% of SABMiller. The partial share alternative was designed, as chief executive Carlos Brito said on a conference call, “with and for” Altria and BevCo.
The cash offer is a 44% premium on the closing price of SABMiller shares on September 14, the last day before renewed market speculation of a tie-up.
But the SABMiller board said in a statement on Wednesday that the proposal “still very substantially undervalues SABMiller”. It noted that under the partial share alternative each SABMiller share was valued at about £37.49 and, assuming a pro-rata election for the partial share alternative under the latest proposal, each SABMiller share was valued at about £40.21.
The board also flagged the “highly conditional nature of the proposals”, including significant regulatory hurdles it faced in the United States and China “on which AB InBev has not yet provided comfort to SABMiller”.
Responding to the rejection on Thursday, Brito placed the ball squarely in the shareholders’ court: “How long will it be before shareholders see a value of over £42 in the absence of an offer from AB InBev? If shareholders agree that we should be in proper discussions, they should voice their views and should not allow the board of SABMiller to frustrate this process and let this opportunity slip away,” he said.
It appears that it will come down to the Santo Domingo family and analysts believe AB InBev still has room to sweeten the deal.
The company confirmed that it does not currently have the support of BevCo for the proposed combination. Jean Pierre Verster, an analyst at 36ONE Asset Management, said: “The Santo Domingo family are the kingmakers here.”
The SABMiller board had previously indicated a fair value price of £43 to £45, Verster said, and the cash offer was not too far off from that figure.
“But it’s quite far away from the [partial] share offer – that’s more important for the Santa Domingo family,” he said.
Reading between the lines, Verster said it was clear the board wanted AB InBEv to increase both elements of the offer to get to an average consideration within the £43 to £45 rate.
Verster said he believed that AB InBev did have the room to increase the offer, given its current profitability, and to take on additional debt. The synergies expected to come from a combined entity held “significant value” for AB InBev.
According to his calculations, the combined entity would have a market cap of an estimated R3-trillion, more than double the value of the JSE’s biggest listed firm, British American Tobacco.
Although AB InBev had said that it saw space for most of the SABMiller management in the combined group, there was a question of how the dynamics of a merger at this scale would affect the companies’ cultures.
But AB InBev had intimated it was sensitive to SABMiller’s South African roots, Verster said, seeking a secondary listing on the JSE as well as having a local board.
Brito highlighted the appeal of SABMiller’s African footprint and he has succeeded in reassuring a key African shareholder, the Public Investment Corporation. The PIC said in statement that the promise of a secondary listing had addressed one of its concerns over the deal.
But the merger faces regulatory headwinds in the US and China.
In the US, where AB InBev is the largest brewer and owns brands such as Budweiser, SABMiller has a joint venture with Molson Coors – MillerCoors.
But there was a “very elegant and simple” solution to any concerns US regulators might have, Verster said. The combined entity could simply sell back the joint venture stake to Molson Coors, a ready buyer.
Similarly, in China, SABMiller has a joint venture with China Resources Enterprises, in CR Snow, the producer of China’s number one beer, Snow, and AB InBev has a 15% market share in the country.
The joint venture would need to sell one or two of their brands or come to an agreement with the Chinese authorities, Verster said.
There is speculation that the bid will turn hostile, but a competition lawyer, who did not want to be named, said that, with a bid of this size, it was unlikely.
“There are just too many moving parts that could go wrong and it’s too easy to fend off [a hostile bid] with regulatory delay.”