Brewer Clears Path to Deal -- WSJ

Board of SABMiller recommends AB InBev's sweetened offer to its shareholders

By Tripp Mickle and Saabira Chaudhuri 

Anheuser-Busch InBev NV has cleared a major hurdle to completing its $100 billion-plus megamerger with rival SABMiller PLC, a much-needed deal for the Belgian brewer that reported a steep fall in profits on Friday.

Earlier this week, AB InBev pre-emptively increased its bid for SABMiller to head off a shareholder revolt over concerns about the deal's valuation after the British pound plunged following Britain's vote to leave the European Union.

The Belgian brewer's gamble paid off Friday when SABMiller's board recommended to shareholders AB InBev's final offer of GBP45 a share from GBP44 a share.

The recommendation came the same day Chinese regulators approved the merger. The approval by China's Ministry of Commerce, which was expected, was the final regulatory precondition.

Now both AB InBev and SABMiller shareholders must vote on the deal, expected to close this year.

The turbulent weeks around the deal illustrate how the U.K. vote has rocked global businesses.

The drop of the British pound by more than 10% against the dollar drove the value of AB InBev's cash offer to SABMiller well below its alternative cash-and-share offer because AB InBev shares are priced in euros. Initially, the cash offer was designed to be a premium.

The discrepancy raised alarm among shareholders and board members, something AB InBev tried to head off by raising its bid by about $2 billion. The company also took a hit from its December hedge against its exposure to the British pound.

AB InBev on Friday reported a huge drop in second-quarter profit as it reeled from a $1.77 billion loss tied to the currency hedge. It also estimated it is spending $450 million a quarter in interest on debt to finance the deal.

The brewer lowered revenue guidance for Brazil, saying it expects flat revenue this year because of economic turmoil, down from growth of 4% or more.

Exane BNP Paribas analyst Eamonn Ferry said the quarter was "poor," marking a weak performance for four out of five quarters.

In pre-emptively raising its SABMiller bid, AB InBev showed just how much it needs its rival. Acquiring SABMiller will give it access to Africa's fast-growing beer market at a time when it is struggling to sell Bud Light and Budweiser in the U.S., its largest market, and Brazil.

But the deal became a target for activist investors and traders after Brexit.

The cash-and-share offer was designed to appeal to both of SABMiller's biggest shareholders -- U.S. tobacco company Altria Group Inc. and Colombia's Santo Domingo family -- who wanted to maintain an interest in the beer industry.

Investors such as Elliott Management Corp. bought shares of SABMiller, then called on the board to address disparity between the offers, according to a person familiar with the matter.

When SABMiller's board met July 20 ahead of the company's general meeting, they raised "huge concerns" about the deal's value, the person said.

SABMiller's advisers tried to answer the board's overriding questions about whether it still made sense, raising the possibility AB InBev might turn hostile, taking the deal directly to shareholders, the person said.

On July 22, SABMiller Chairman Jan du Plessis called AB InBev Chair Olivier Goudet and relayed the board's concerns, people familiar with the conversation said. Over the weekend, AB InBev's advisers worked on a higher bid, two of the people said.

Mr. Goudet called Mr. du Plessis late Monday and told him that AB InBev would raise its offer the next day, according to a person familiar with the matter. It boosted the cash offer to GBP45 a share and raised the cash portion of its cash-and-share offer by 88 pence a share, a move that would sweeten Altria's windfall by $500 million.

AB InBev described the new offer as final, which under U.K. takeover rules prevents it from making another offer for six months, a risky decision limiting its ability to appease shareholders.

Both AB InBev and SABMiller spent the subsequent days canvassing investors to gauge their opinion.

At least two shareholders, including Aberdeen Asset Management PLC, opposed the new offer. However, others embraced it. SABMiller halted all integration work with AB InBev as it considered the offer, sending beer stocks tumbling.

On Friday, SABMiller's board assembled at the company's London office. Centerview Partners Holdings LLC, which had been hired by Mr. du Plessis to provide an independent review of the transaction, presented its analysis, according to a person familiar with the matter.

The board voted unanimously in favor of the deal, in part because the company was too far along with the integration and regulatory approvals to reject it, the person said. But the board said that its two biggest shareholders -- Altria and the Santo Domingo family -- should be treated as a separate class and vote separately, reducing the percentage of share holdings needed to block the deal to 15% from 25%, according to analysis by Stifel Nicolaus & Co.

Mr. du Plessis called the board's decision "difficult" and "challenging."

Eyk Henning contributed to this article.

Write to Tripp Mickle at [e-mail] and Saabira Chaudhuri at [e-mail]

(END) Dow Jones Newswires

July 30, 2016 02:47 ET (06:47 GMT)

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