World: Financial world emerging as the biggest winner from AB InBev’s proposed takeover of SABMiller

AB InBev is $9 bln down, so far, on a currency hedge the brewer arranged for its £79 bln takeover of rival SABMiller. But it will not be drowning its sorrows, BDlive reported on September 10.

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 bln.

The financial world is therefore emerging as the biggest winner from the proposed tie-up rather than SAB’s shareholders. The UK 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 bln cash portion of its offer for SAB.

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 EU — 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 bln on the income statement and $5.9 bln 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 was not 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 had not 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-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 £1 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% 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 will not be a deterrent to doing something similar. And sometimes, constraints can be valuable.

11 September, 2016