To recap on what has happened so far: In November 2015, the SAB board recommended that shareholders accept a takeover offer by AB InBev at a cash price of £44 (R948 at the time) per share. Most of the offer is for cash, but a partial share alternative (PSA) was created with SAB’s two biggest shareholders, Altria and Bevco, who jointly own 41%, in mind. The PSA was designed to dissuade the remaining shareholders from choosing this option – its market value in November 2015 was set 5% below the cash offer.
After the recent strengthening of the euro versus the pound and movements in AB InBev’s share price in Brussels, the implied market value of the PSA has now increased to £49.68 per share, well above the £44 cash offer made in November 2015. On 26 July this year, AB InBev increased its bid to a final cash offer of £45 per SAB share. This is still 10% below the current PSA value and, at current exchange rates, 9% lower in rand terms and 11% lower in dollar terms than when the SAB board recommended the offer late last year.
On 22 August, the UK’s High Court ruled that Altria and Bevco would have to be treated as a separate voting class when shareholders vote on the merger on 28 September. This means that 75% of the remainder of SAB’s shareholders would have to support the merger as the 41% of Altria and Bevco won’t be counting towards the 75% required support.
This will make it easier for minority shareholders to block the merger, who may now be getting cold feet about supporting the proposed alliance, mainly due to the lower offer price for non-UK investors as a result of the weaker pound. The underperformance of SAB’s share price (which was effectively linked to the rand-pound exchange rate) versus the European consumer staples peer group has also meant that the ‘deal premium’ on SAB has disappeared.
If shareholders vote against the merger, AB InBev will likely launch a hostile takeover of SAB. It shouldn’t be too hard for AB InBev to obtain 50% of SAB’s shares directly from shareholders to gain control over the company. If they then fail to acquire 75% of SAB, which would enable them to delist the company on the JSE, it may not be such a bad prospect to remain a minority shareholder in SAB under the control of AB InBev. The Belgium-based brewer has a track record of improving the profitability of its acquisitions, while the sale of SAB’s US, European and Chinese operations will leave it in a strong cash position.
The big question for South African investors is whether or not they should now sell their SAB shares prior to the shareholder vote. We don’t think so. At SAB’s current share price, we feel it is best to hold on to the share despite uncertainty about the outcome of the vote. Our reasoning is based on where we see the balance of risk to the share price after the vote. SAB’s share price has been driven down by the weaker pound despite the fact that the intrinsic value of the company is derived from operations outside the UK. This has closed the gap between the fair value of SAB and the pound offer price, leaving less downside risk to the share price should the merger deal collapse. In this case, investors may in fact start seeing more value in SAB under a hostile AB InBev takeover scenario.
On the other hand, should the pound recover in the shorter term, the probability of the deal being approved by shareholders increases, while driving up the rand value of the cash offer, which should benefit the rand share price in South Africa.
