ABI-SABMiller-Heineken: What Now?

FILED SEPTEMBER 16, 2014

Dear Client:

We have conflicting reports about whether ABI is prepping financing for a possible bid for SABMiller; meanwhile SABMiller has approached -- and been initially spurned -- by Heineken NV. Quick note: ABI-SABMiller would be so big as to have nearly a third of the global beer market and be nearly twice the size of its next competitor, Heineken. SABMiller-Heineken would make it inch out ABI as the largest brewer by volume. So two very different outcomes. It matters.

While the WSJ reported yesterday that ABI is lining up financing for a run at SABMiller, we also reported CNBC's David Faber poured cold water on the speculation by saying that no such financing is in the works. However, after some digging we found that Faber said the exact same thing back in May 2008 when rumors were flying that InBev was about to make a hostile bid for A-B. "That's not true," he said at the time. "The folks at InBev tell me there is no imminent offer." That turned out to be somewhat wrong, (I say somewhat because of differing interpretations of what "imminent" means). It makes one wonder if ABI or one of their bankers is Faber's source again this time, as they have every motivation to keep their intentions under wraps for as long as possible. (One reader wryly noted, "Business is war and the first casualty of war is always truth."). But consider that Stifel's Mark Swartzberg told CNBC, the fact that SABMiller made a play for Heineken means that "we now see a higher probability that ABI" is making a play for SABMiller, because the fact that SABMiller is making a play for Heineken probably means it is attempting to make itself too big for ABI to swallow.

DEAL OR NO DEAL? Yet another view with some basis in fact is provided by ISI Group's Robert Ottenstein, who spoke to a member of the UK Takeover Panel who indicated ABI would likely have to notify the panel of takeover talks, and there ain't been no notifications, no how. Based on that, it's unlikely ABI-SABMiller would happen this year at least. "While we do not purport to be experts on the U.K. Takeover Code," Robert writes, "and we have not consulted outside counsel, we believe if ABI made an offer or were actively considering doing so ... the Takeover Panel would have required disclosure by ABI and/or SAB. Bottom line: We do not believe that an ABI/SAB transaction is off the table, but instead believe that an offer may not occur in the next 3-6 months. We have previously stated that we see a 50% probability of an ABI/SAB transaction by end of 2015. SABMiller's disclosure that it had approached Heineken and that Heineken made what we interpret as a definitive rejection of SABMiller, gives us more confidence in an eventual transaction," he concludes. However, "ABI could now be doing a significant amount of research to determine whether they want to make an offer for SABMiller and at what price." Indeed, Robert later told the Financial Post that "SAB's approach to Heineken could accelerate ABI's timeline to bid for SAB."

BANKERS AND STOCK SPECULATORS WIN. What's really happening out there? Difficult to know for sure, but one thing we do know is that Molson Coors' stock started rallying with heavy trading volumes on Friday, before news broke in Bloomberg on Sunday about SABMiller's approach to Heineken and Heineken's subsequent Heisman move. That opened a news window for a source to tell the WSJ that ABI was prepping financing for a takeover of SABMiller, and then for CNBC to say that is bunk. Whether or not any of that is true, the leaks sure smell like market manipulation with all the dramatic stock movements. Somebody is making money, you can take that to the bank.

HOW DOES IT AFFECT US? What does it mean for the U.S.? Well, just like in the ABI - Modelo deal, any deal would have to pass antitrust muster with the DOJ, so any changes in the US would likely be minor in net effect to distributors. Even if ABI purchases SABMiller, the most likely outcome of such a deal is for Molson Coors to purchase SABMiller's stake in MillerCoors . That would give MillerCoors one owner, which perhaps would give that company the jolt it needs to get around the innate stagnation and bureaucracy that inevitably comes with having two behemoth owners.

SABMILLER - HEINEKEN ON BACKBURNER.... for now. While a SABMiller - Heineken hookup seems unlikely right now given the immediate stiff-arm the Heineken family gave SABM, we shouldn't wholly discount the possibility of it happening in the end. Stranger things have happened, and the seed has been planted. The Heineken family owns over 50% of the voting stock, dat is waar as they say in Amsterdam, but only owns 23% of the common stock. So the family still has somewhat of a fiduciary responsibility to the majority shareholders. Dismissing the first advance is a smart move regardless -- that's Negotiation 101 right? -- but if SABMiller gets serious with a Big Whale of an Offer, the family has to give it consideration. Like Don Corleone often said in The Godfather, some offers are too good to be refused.

But there are hurdles beyond the family's reluctance: The combined company would have a 51.9% market share in Italy, 68.7% in the Netherlands and 72.8% in Poland and be huge in Africa, says the NYT DealBook. "All this adds complexity, but it need not be a deal breaker," says DealBook.

"SABMiller's task is to show that merger gains, less whatever concessions are needed to assuage competition watchdogs, will create more value than will ever come to an independent Heineken. In that case, Heineken's other owners could be expected to push the family to reconsider."

I'll give the last word to Tony Bucalo of Grupo Santander: "If the wheels are not yet in motion on another brewing mega-deal, they may be now as SABMiller may have thrown down the gauntlet."

One thing I know for certain: there will be more muddy waters before we reach clarity on all of this, so brace yourself for that. (Okay, so I got the last word).

CHESBY ACQUIRES 1.6 MILLION CASE KOZAK BEVERAGES

Reyes Beverage Group's Chesbay Distributing has entered into an agreement to acquire substantially all of the assets of Petersburg, Virginia-based Kozak Beverages, Inc., BBD has learned.

The company will reportedly operate as part of Chesbay Distributing, expanding its territory across southeast Virginia. Combined operations will deliver over 7 million cases annually to 3,100 retailers in the Chesapeake Bay surrounding area.

Kozak Beverages currently delivers 1.6 million cases of beer a year, including the full portfolio of MillerCoors, Crown Imports, Heineken USA, DGUSA, Boston Beer, Anchor Brewing and numerous craft brewers brands, to 650 licensed retailers in Amelia, Chesterfield, Dinwiddie, Greensville, Isle of Wight, Prince George, Nottoway, Southampton, Surry and Sussex counties, per company statement.

Reyes Beverage Group chief Ray Guerin said they are "proud to expand our beer distribution business in the Commonwealth of Virginia where we have deep roots."

Chesbay Distributing president Patrick Collins said they look forward to "serving our new customers, welcoming our new employees and growing the brands in our combined portfolio and territory for the benefit of all."

Until tomorrow, Harry

"There are only two kinds of scholars; those who love ideas and those who hate them."
-Emile Chartier

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