SABMiller Pauses AB InBev Deal Integration After Increased Offer

The companies had started convergence planning months ago to ensure a smooth transition from day one of the deal nicknamed 'megabrew.'
By Renee Cordes ,

Is AB InBev (BUD) - Get Report 's 'megabrew' deal for SABMiller (SBMRY) in danger of unraveling?

That's what some fear after SABMiller pressed the pause button with a board decision still pending on a higher offer from its Belgium-based suitor this week. Bowing to pressure from activist investors, AB InBev raised the tab to £79 billion ($103.98 billion) from £73 billion agreed last November.

AB InBev, which makes Budweiser, Stella Artois and Becks, has said that the new offer was final. That offer, prompted by pressure from activist investors amid the falling British currency, was immediately rejected by one of the target's main shareholders, Aberdeen Asset Management. The fund manager on Tuesday called the latest offer "unacceptable as it both undervalues the company and continues to favor SABMiller's two key shareholders."

More turbulence has emerged in the last 24 hours, with SABMiller CEO Alan Clark reportedly telling employees in a company memo that all convergence planning is on hold, and all contact between the companies should be put off until further notice.

"I appreciate this will cause lots of internal and external speculation," Clark is quoted as writing. "However, please stay focused, and I will update you as soon as I am able to."

A spokesman for SABMiller declined to comment.

A spokeswoman for AB InBev said via email that the company has no comment on the press reports.

AB InBev shares were down 2.61% in Brussels Thursday at €110.15, giving it a one-year return of 1.37% and a current market value of around €181.9 billion.

SABMiller shares slid 2.10% in London to £92.00. The stock is up 31.12% over a year ago, and its market cap is now at £71.08 billion.

As is often the case with cross-border M&A deals, SABMiller and AB InBev had started convergence planning several months ago -- during which no commercial information is shared -- to ensure a smooth transition from day one.

Analysts at Stifel Financial Advisers said in a note they don't see the latest developments "as a sign SAB is considering changing its recommendation of the transaction," but rather as a "symptom of fiduciary duty" and says it's "very unlikely" that AB InBev upped its offer by less than what it thinks is needed to achieve the 75% acceptance threshold.

In a separate note, Redburn equity analysts argue that it serves the SABMiller board to wait before deciding its next move, since China has yet to give the green light for the deal with AB InBev, and the Belgian company is due to report results on Friday.

Noises about the deal turbulence come just as it appeared to be nearing the finish line, after clearing conditional approval from the U.S. Department of Justice last week to keep a second-half planned closing on track.

A deal failure would be a rare personal defeat for AB InBev CEO Carlos Brito, the beer industry's de facto dealmaker-in-chief who runs the Leuven, Belgium-based company from New York City. He's perhaps best known for leading InBev's $52 billion takeover of St. Louis-based Anheuser-Busch to create the world-leading AB InBev in November 2008, and repeatedly refers to the agreed SABMiller tie-up as the world's "truly global brewer."

SABMiller has yet to formally respond to AB InBev's revised offer, and the SABMiller declined to say when its board will meet.

On Tuesday it said that its board will continue to consult with shareholders and meet formally to review it. It also disclosed that it had hired Centerview Partners as an additional financial adviser.

AB InBev is due to put out second-quarter results this Friday before markets open. Analyst Wim Hoste of KBC Securities expects net profit to decline by 59% to $791 million, mainly due to financial costs related to financing arrangements for the SABMiller deal as well as adjustments on pound hedges also related to the acquisition.

But the analyst remains bullish on the Bud maker "for its solid market positions in a number of the world's largest peer profit pools." Hoste is sticking to his hold rating on the with a target price of €110.

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