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 PLC'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 descent of the British pound by more than 10% against the
dollar caused the value of AB InBev's cash offer to SABMiller to
fall well below its separate 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 said 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, said people
familiar with the conversation. 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 also 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 Tripp.Mickle@wsj.com and Saabira
Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
July 29, 2016 18:01 ET (22:01 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.