Investors who had sought an arbitrage spread in shares of SABMiller (OTCPK:SBMRF)(OTCPK:SBMRY) related to the Anheuser-Busch/Inbev (NYSE:BUD) buyout witnessed the Brexit vote erase that spread. The Pound hit a high of about $1.50 on June 23 and opened the next day much lower.
As we can see after the votes were counted and "Leave" was the declared winner the Pound fell on its face and has not even come close to recovering despite broad markets not only recovering but reaching record highs. The vote is still causing indigestion for many aspects of the economy and even the Miller board got cold feet about the merger.
Not wanting to let their prize slip through their fingers Anheuser-Busch upped their offer to £45 from the previous £44. At the current exchange rate that is another $1.31 per share for Miller shareholders. This has opened up another arb spread opportunity for investors.
At £45 a share that comes out to $59.15 in cash. Shares of the ADR are trading at $57.65 leaving $1.46 in the middle for a 2.5% gain.
Investors who have been following this merger and the arb spread know all too well that it just isn't that simple. With a merger of this size there are significant challenges. When you add in the "cross-border" complexities those challenges compound. Throw in the Brexit vote and the situation is almost hilariously challenging. Consider the possibility of US rate hikes which would strengthen the dollar and it's downright ridiculous. Addressing some of the larger concerns can help achieve some peace of mind.
The merger is waiting to clear one more antitrust hurdle in China. Both companies have been expecting the thumbs up to come from Chinese regulators any day now since the beginning of June. Regulatory approval from China will likely provide a nice bump to BUD shares and provide more incentive to the Miller board to get this deal done especially with the raise in price from BUD.
As for the Pound, I'm not sure how much further it can fall against the dollar unless the FOMC raises rates. It just doesn't seem like there are many shocks left for the poor Pound. July is out of the question for a raise in rates but August and beyond is always possible even if the FOMC appears more "dovish". The last time the US raised rates in December 2015 the Pound dropped as you can see in the chart above and thusly prevents a significant risk to an already downtrodden currency. Obviously the US raising rates would negatively impact the arb spread we have before us.
To help ease some worries investors may have we should consider the coming dividend for Miller shareholders. The dividend in the amount of $.9375 goes ex-div on August 5th and is paid on August 19th. If you add the dividend to the arb spread the overall gain is raised to 4.1%.
Anheuser-Busch appears eager to close this deal and for good reason. The more time this deal remains in "pending" status the more time Miller has to think about it which is clearly not working out well for BUD. Once the Chinese sign off on the merger I would expect the deal to close not long after. Both companies had anticipated a 2nd half of 2016 close of the deal and we are now there. If you enter into the arb play the faster this deal closes the better.
The 4.1% return is not without its risk but with the Pound already beaten down, the coming dividend and just one more major anti-trust hurdle it could be a quick profit. You could pair trade with shares of BUD as well and take advantage of the spikes the company has seen as the merger nears completion.
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