London - SABMiller shares traded 10 percent below the price Anheuser-Busch InBev agreed to pay for the beermaker, a bigger discount than often seen in takeovers, because the deal faces months of scrutiny by antitrust regulators around the world that may yet derail the transaction.
Typically, when a deal is expected to sail through to completion, the shares of a target trade just below the offer. In this case, many traders who speculate on the outcome of merger agreements are shunning the deal because it will take too long for the transaction to close, and there are better opportunities in other takeovers, said Jean-Francois Comte, co-manager of the $144 million Lutetia Patrimoine arbitrage fund in Paris.
The tie-up between the two companies will be reviewed by competition authorities in the US and China, where SABMiller operates joint ventures with local partners. The combined entity will control about 50 percent of global beer profits and sell one third of the world’s brew. AB InBev will need to sell more than $16 billion of assets to win approval, said Wim Hoste of KBC Securities. SABMiller raised antitrust concerns in spurning AB InBev’s earlier offers, prompting the would-be acquirer to agree to pay the target $3 billion if regulators block the deal.
“There is a residual but misplaced fear the deal won’t happen,” said Andrew Holland, an analyst at Societe Generale. “Given the size of the break fee, there is a huge onus on AB InBev to make this deal happen.”
SABMiller rose 9 percent to close at 39.48 pounds in London after the world’s second-largest brewer said it would recommend AB InBev’s cash offer of 44 pounds a share to stockholders. The companies have an agreement in principle, and under UK takeover rules they have until October 28 to forge a formal deal.
Usually the discount in a target’s share price narrows to about 1 percent by the end of trading in the day a friendly bid is announced, said Christopher Kummer, head of the Vienna-based Institute of Mergers, Acquisitions and Alliances.
For bigger deals, the spread is often wider. On the day Royal Dutch Shell Plc agreed to buy BG Group in April for about $70 billion, the target finished the day at a 10 percent discount to the value of the bid.
China venture
AB InBev said last week that it’s “done significant work on regulatory matters and has identified solutions that provide a clear path to closing”. Without divestitures, London-based SABMiller’s stake in the MillerCoors US joint venture would boost AB InBev’s market share to 75 percent, and the combined company would produce about 40 percent of the beer China consumes, said KBC’s Hoste.
Analysts anticipate that Molson Coors Brewing Company, SABMiller’s joint venture partner in the US, will buy SABMiller’s stake in MillerCoors. Shares in Molson Coors jumped 10 percent to $86.82 at 12.05pm in New York trading, bringing their advance to 26 percent in the five weeks since AB InBev confirmed its intention to acquire SABMiller. The target also holds a 49 percent stake in CR Snow, China’s largest brewer, with the rest held by state-controlled China Resources Enterprise.
Limited appetite
In announcing the tentative agreement, the companies didn’t say how long they expect it to take to win regulatory and shareholder approval and then close the deal. AB InBev also is working with about 10 banks to arrange as much as $70 billion in financing.
“We’re now in the middle of October; a lot of event-driven and risk-arbitrage funds have not had great results so far this year,” said Comte. “The appetite from the arbitrage side is limited for this deal because a lot of people want shorter durations at this point, and when you have a lot of opportunities in deals closing before December with decent spreads, why would I rush into putting my money into the ABI/SAB spread if it has a year longer to run out?”
The discount also reflects the size of the deal, which at almost 69 billion pounds ($106 billion) would be the biggest acquisition of a UK company and the largest ever in the brewing industry. Often when a deal is announced, long-term shareholders who don’t want to wait for it to close sell at a slight discount to the takeover price. The buyers often are arbitragers, who try to capture the spread between the price they paid and the price the acquirer will pay at closing.
“In a deal of this scale, arbitrage buyers probably do not have the firepower to tighten the discount,” said Richard Marwood, who oversees about 10 billion pounds at Axa Investment Managers, including SABMiller stock.
BLOOMBERG