SABMiller board plays hard to get

On Wednesday AB InBev (ABI) proposed a £42.15 cash price, or a share alternative of £2.37 cash plus 0.484 shares of ABI restricted stock with a five-year lock-up (equivalent to £37.49 at October 6 prices).

The cash proposal represents a premium of about 44% to SABMiller’s closing share price of £29.34 on September 14, the day before speculation about a possible deal drove the share price upwards. If one considers SAB’s share price of £36 a year ago, the cash deal seems less attractively priced at a 17% premium.

The share alternative, which is a less valuable offer of cash and shares, is aimed at pleasing SAB’s largest shareholders, Altria and the Santo Domingo family, which collectively hold 41% of the shares. While the offer is lower, it allows the investors to remain invested in the combined company and offers tax advantages to both.

This latest deal implies a blended average offer price of £40.23 per share for SABMiller. This follows two previous written proposals to the board of SAB at £38 and £40, which were rejected out of hand.

If the two companies were to merge it would create a £180 billion company that would produce one out of every three beers drunk globally and would generate revenue of £42 billion.

Intense behind the scenes lobbying will now take place, with ABI required to table a formal offer before 5:00 pm on October 14, according to UK takeover rules.

“AB InBev is disappointed that the board of SABMiller has rejected both of these prior approaches without any meaningful engagement,” the maker of Becks, Corona and Budweiser said. “AB InBev believes that the revised cash proposal of £42.15 per share is at a level that the board of SABMiller should recommend.”

The SABMiller board did not agree. “SABMiller is the crown jewel of the global brewing industry, uniquely positioned to continue to generate decades of standalone future volume and value growth for all SABMiller shareholders from highly attractive markets,” said Jan du Plessis, chairman of SABMiller. “AB InBev needs SABMiller but has made opportunistic and highly conditional proposals, elements of which have been deliberately designed to be unattractive to many of our shareholders. AB InBev is very substantially undervaluing SABMiller.”

However, in a move that raises the stakes, US tobacco company Altria, maker of Marlboro cigarettes and owner of about 27% of SABMiller, is right behind the offer: “Altria believes that a combination of these two companies would create significant value for all SABMiller shareholders. Altria supports a proposal of £42.15, or higher, with a partial share alternative, and, subject to finalisation of terms, would be prepared to elect the partial share alternative.

“Altria urges SABMiller’s board to engage promptly and constructively with AB InBev to agree on the terms of a recommended offer.”

The Santa Domingo family, which acquired 15.1% of SABMiller when it sold its Colombian-based brewing company Bavaria to SAB in 2005, has not yet thrown its weight behind the deal, according to ABI.

In a conference call on Wednesday morning, ABI CEO Carlos Brito was hesitant about commenting on whether the company would go hostile in the event that SAB failed to back the deal. He stressed that the current offer is very favourable for shareholders.

Going hostile is not wise, says Exane BNP Paribas analyst Eamonn Ferry. “We are not sure it is a very bright idea to go hostile here – the deal is complex enough as it is. We think they [ABI] may have to cough up more to get the board to engage or walk away.”

With no white knight or poison pill, and with Altria putting its support behind the current bid or higher, the SAB board is expected to push for a better price – rather than outright rejection of the deal. “This represents an attractive offer, [however] we would see potential for a further, final sweetened offer around the mid £40s per share,” wrote Nomura beverages analyst Edward Mundy, in a note on Wednesday.

“This could imply a blended offer price of about £42 per share (assuming the equity component is unchanged at £37.49) or £43 per share (assuming the equity component remains at a discount of 11% to the cash offer price).

However at these prices, the deal becomes less attractive, according to Olivier Lebrun, an analyst with Natixis. “An alliance between SABMiller and a brewer other than ABI would create much more value than an ABI-SABMiller deal,” he wrote in a note on Wednesday.

What is clear is that ABI views Africa as a critical driver of growth for the combined company. To show its commitment to the continent, the company plans a secondary listing in Johannesburg and a local board. “We would highlight that about 10% of SABMiller shares are held in South Africa,” said Mundy. “The secondary listing of ABI shares serves to appease local shareholders (including the Public Investment Corp., a 3% shareholder of SAB stock).”

It is unclear whether ABI has been in contact with SABMiller’s partners in Africa, Castel or the Coca-Cola Company.

The share price ended the day slightly down at R747.00, in Johannesburg.

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