We've all heard that some shareholders of SABMiller, (OTCPK:SBMRY) are now unsatisfied with the revised cash offer from AB InBev to acquire SABMiller. One of the more vocal discords among smaller shareholders has been Aberdeen Asset Management, which has said the revised deal remains unacceptable. Mind you, this isn't necessarily cause for Altria Group, (NYSE:MO) investors to panic. Aberdeen owns about 1% of SABMiller, while SABMiller's two largest shareholders, MO, and Bevco own ~40%, and both of them support the deal.
The Deal, Pre-Brexit
So, before I dive into what's changed since Brexit and why some investors are unhappy with the deal, let's revisit the structure of the deal, pre-Brexit. AB InBev proposed two offers to SABMiller shareholders in an effort to acquire the brewer: 1) an all cash 44 pounds/share, (recently raised to 45 pounds/share) offer, or 2) 0.483969 AB InBev shares + 3.778 pounds for each SABMiller share, valuing that offer at the equivalent of 39 pounds/share total at that time, a discount to the cash offer. I should also note that AB InBev did not put a clause on the fluctuation between the euro and GBP, so it was made clearly known that investors needed to hedge their own currency risk, just as MO did. See this excellent article by Patrick Gunn for details on MO's hedging program. The cash and stock offer is available to 41% of SABMiller shares, essentially designed for MO and Bevco. If we back out the 3.778 pounds/share from the cash and stock offer, we see that AB InBev's shares are worth ~35.2 pounds for each SABMiller share.
The Deal, Post-Brexit
However, since the deal was announced, AB InBev shares have risen 16% (in euros) and the euro has appreciated ~14% against the pound. How does this change the value of the two offers? Well, the cash offer remains at the revised 45 pounds/share, but the stock part of the cash and stock offer has increased 30% and the cash part has increased 1 pound/share, bringing the total value of the cash and stock offer to ~50 pounds per SABMiller share. What does this mean for MO, and how does this translate to US dollars? According to MO's latest earnings report, they expect to receive ~$3B US in cash, up from $2.5B when the deal was first announced, (this is the one pound increase in cash offer). In addition, AB InBev's share price has risen from ~$110/share from when the deal was announced to $122/share changing the company value from $176B to $196B. Since MO will own 10.5% of AB InBev, (NYSE:BUD), the value of their stock option has increased $2.1B. This is excellent news for MO investors as they are now ~$2.6B dollars richer from when the deal was first announced.
However one could see how smaller shareholders in SABMiller, whom maybe want to elect the cash and stock option feel upset. The bigger shareholders stand to gain ~11% premium over the cash offer that other shareholders would receive. Even under the revised offer, AB InBev did not extend the cash and stock offer to more shareholders, nor up the cash offer to something closer to 50 pounds/share, so I could see another reason for some smaller holders to be upset with the new offer. However, as I mentioned earlier, AB InBev made it very clear that they would not take currency fluctuations into account, so these smaller investors should've hedged their currency risk. I would also caveat that under the cash and stock offer, the shares cannot be sold for five years, so it's not like there's any gains that could be realized right away. In any event, I don't think MO or Bevco would've been in a rush to sell their new stake in the world's largest beer brewer, so that structure works well for them.
I don't really think the deal is in any danger of falling through with at least 40% of shareholders pushing for the merger. A lot of time and money has been spent on the merger thus far, with AB InBev and SABMiller already starting integration plans earlier this year. Furthermore, AB InBev can always expand the cash and stock offer to more shareholders if they think they won't win strong majority (75%) approval. All in all, MO is a big winner here and they were competent enough to hedge their currency risk, so they deserve to be big winners out of this deal.
Disclosure: I am/we are long MO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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