WHAT IT MEANS: SABMiller-AB InBev deal hurtling towards the finish line. AB InBev could be eyeing an even bigger acquisition.
It’s difficult to know precisely when the “megabrew” deal became inevitable, but it was probably long before November 11 last year, when AB InBev announced its £44/share offer for SABMiller.
That SA Breweries (SAB) would be involved in the megabrew deal might not have seemed inevitable back in 1999, when Meyer Kahn, Graham Mackay and Malcolm Wyman transferred the beer group’s primary listing from Johannesburg to London. Back then very few people would have imagined that two emerging-market beer groups (SAB and Brazil-based AmBev, which was created through a merger in 1999) that had little in the way of an international profile would soon be slugging it out for the top position in the global beer market.
After the Miller acquisition in 2002, when SAB became SABMiller, it started to become certain that SABMiller would be a contender. That deal gave SAB access to dollar funding, which helped to secure its role as a major player in the consolidation of the global beer industry that Mackay had flagged a decade or so earlier.
Meanwhile, AmBev became InBev in 2004, when it acquired Belgian Interbrew, and in 2008 it pulled off an audacious bid for Anheuser Busch. The merged entity, renamed AB InBev, had a comfortably dominant position in the global market.
After SABMiller management botched an attempt to tie up with Heineken, the scene was set for the final, unavoidable showdown. That AB InBev rather than SABMiller has emerged in the driving seat can probably be put down to the much stronger fire power and the dogged ambition of AB InBev’s controlling shareholder, Brazil-based 3G Capital, which has driven a frighteningly efficient operation.
But last week, for perhaps no more than a few hours, it looked as though the deal might not be inevitable after all. AB InBev announced a final offer of £45, which was less than some of the shareholders — now including some aggressive hedge funds — had been hoping for.
SABMiller CEO Alan Clark issued an internal memo calling an immediate halt to the “convergence planning” that had been going on between the two groups since around March. The board, said Clark, wanted to consider the final offer and engage with shareholders.
Some in the market interpreted this as a hostile move rather than just a cautious attempt to ensure the SABMiller board looked independent when it made its recommendation on the final offer.
But as Stifel Equity Research says, given its undisputed market intelligence it was very unlikely that AB InBev increased its offer by less than what it thought necessary to secure 75% of shareholder support.
AB InBev was far too canny to get caught out so late in the day by paying £1 or £2 less than needed. (The increased offer cost AB InBev just US$2bn.)
Now, almost nine months after it was first formally announced, there is too much at stake for too many powerful people for this deal not to happen. It has to take place. For all intents and purposes AB InBev-SABMiller is now a scrambled egg.
The fact that, if the deal collapsed, AB InBev would be forced to take an estimated $10bn write-off on the forward cover it took against an expected fall in the dollar-sterling exchange rate would be the easy part. (The costly forward contract was the only significant misstep in AB InBev’s otherwise dauntingly flawless campaign.)
After months of frantically paced merger-related activity, a much greater challenge would be dealing with an SABMiller management team that has braced itself for dramatic change. The people who stay on with AB InBev face considerable adjustment over the longer term; more immediate is the change facing the teams that will be cut from SABMiller.
To secure regulatory approval across the globe, AB InBev CEO Carlos Brito has agreed to offload huge chunks of SABMiller’s brands. More than 50% of its beer volumes, and the accompanying management teams, are being prepared to bed down with new owners.
Though those transactions cannot be formally implemented until the deal is finalised, it’s safe to say that thousands of SABMiller employees have by now reconciled themselves to new controlling shareholders. Reversing that mind-set (to remain with an independent SABMiller) could be extremely disruptive and discomforting.
Perhaps less important, but with huge heft in the market, is the army of advisers who will get paid for several months of work if the deal is completed. In a deal like this the only experts with secure fees are the lawyers who appear before the various regulators.
Add to these the hedge funds that pour into a megadeal like this in a bid to profit from any discrepancy in pricing. If the deal fails and the SABMiller share price falls, they’re set to lose billions.
While it’s difficult to feel much for SABMiller executives no longer in line for generous share option payouts, the prospect of holding on to options for a few more years might disappoint some of them (and act as a disincentive?).
And then there’s AB InBev, a deal junkie if ever there was one. In its relatively short life the forces behind AB InBev have become so accustomed to winning that failure would be a traumatic blow and not just because of the sunk costs, including the $10bn write-off on the futures contract. It would damage their reputation among funders for whom they’ve generated excellent returns on their growth path from Brazilian minnow to global whale.
More intriguingly, the deal that is being touted to follow SABMiller, the acquisition of Coca-Cola, may need SABMiller, or rather SAB, to be part of the AB InBev fold.
SABMiller has extensive Coca-Cola operations in Africa.
In addition, the estimated $250bn price tag on Coca-Cola dwarfs the $103bn SABMiller deal and would be considerably more complicated in all respects. AB InBev would need a flawless track record if it wanted to take on this enormous acquisition.
Brexit has taught us that nothing is really inevitable. But the powerful forces pushing for this merger make it very close to being that.