UK: Possibility of Brexit adds a touch of doubt to AB InBev’v takeover of SABMiller

Last October, the £44-a-share offer by Anheuser-Busch InBev (AB InBev) for SABMiller seemed so eye-wateringly generous there was little doubt it would win over shareholders, BDlive reported on May 23.

Six months later, the uncertainty around the coming UK vote on European Union (EU) membership and the possibility of Brexit has introduced a disturbing element of doubt.

Bernstein, one of the leading research firms covering the $104 bln merger, has raised the possibility (admittedly slight) that continued depreciation of sterling could persuade the SABMiller board to oppose the deal. When the offer was announced in October, it represented a hefty 50% premium to SABMiller’s share price on the day before media speculation about a potential deal. It was an easy deal to support.

But Bernstein notes that in recent months a variety of factors have worked in SABMiller’s favour in terms of its sterling valuation. Large-cap European equities have rallied about 14% since the deal was announced. SABMiller’s underlying earnings have increased about 6% in sterling terms as a result of sterling’s Brexit-related weakness against SABMiller’s operating currencies. (A notable exception to that improvement is the rand.)

Last week’s financial 2016 results show sustained positive organic performance that Bernstein estimates could add about 4% to SABMiller’s earnings estimates. The effect of the stronger earnings and rating outlook would be compounded by continued weakness in sterling. In the past several months, the sterling trade-weighted index has devalued about 9%, largely because of Brexit fears.

"If the UK voted to leave the EU, we could see significant further devaluation," says Bernstein, as it eyes an estimated share price of £44 for a standalone SABMiller.

If the SABMiller share price were to appreciate close to £44, Bernstein says it is possible the SABMiller board could withdraw its approval for the deal, "which could well lead to a rejection of the deal when it is put to SAB shareholders".

The SABMiller directors have given irrevocable undertakings to vote in favour of the deal in respect of their personal shareholdings, but Bernstein does not know of any restriction on the board’s ability to withdraw its initial recommendation.

The major shareholders — Altria, with 27% and the Santo Domingo family with 14% — have committed to supporting the £44 offer. The extent of sterling’s collapse (if the UK votes in favour of Brexit) between the referendum on June 23 and the shareholder meeting (expected in late July) would determine how the remaining shareholders vote.

Unless there is a dramatic change in the trading pattern of the rand, South African-based shareholders are likely to vote in support of the transaction. The rand’s depreciation since the deal was announced enhances the £44 offer. Rejection of the deal would be a hefty blow to AB InBev, which has hedged its deal-related exposure to sterling at about $1.53 to the pound. (Its latest results revealed a $1.3bn mark-to-market loss on these hedging contracts.)

It has also raised billions of dollars of loans for the deal, and is committed to hefty advisory fees.

All in all, AB InBev CEO Carlos Brito must certainly be hoping the bookies’ forecast of a 20%-30% chance for Brexit is accurate.

23 May, 2016