Could ABI - SABMiller Deal Be Falling Apart?

FILED JULY 27, 2016

Dear Client:

While we kinda anticipate this deal will close, minority SABMiller activist stockholders are snubbing the 1 pound sterling increase per share increase that ABI fronted yesterday as their "final offer."

Here's what you need to know about that:

Number one: Investors would now have an option to accept a cash-and-share alternative that would pay £4.6588 in cash (which sucks for them because the devaluation of the British pound due to Brexit), and 0.483969 in restricted shares for each share of SABMiller (which is good for shareholders). The share alternative would be available for up to 41% of SABMiller's shares. (Which coincidentally is about how much Altria and Santo Domingo own).

Number Two: ABI, significantly, declared that this offer is "final and that it will not further increase the cash consideration or the cash element or the exchange ratio of the partial share alternative."

Why is that significant? Because under UK law, when you say the bid is final, it's final. However, there could be a cooling off period (3 months) where they return to the bargaining table anew. So while it's kind of a threat, it's not exactly a threat with teeth.

STILL NOT HIGH ENOUGH? Still, one pound a share increase didn't impress some shareholders. It's almost merely "symbolic" to let the SABMiller Board save face, say sources, and not a true value-add given the devaluation of the British pound.

So these activist minority shareholders are pissed because the major shareholders of SABMiller, Altria and the Santo Domingo family, got a big chunk of their payment in shares, which are virtually unaffected by the Brexit devaluation of the British pound sterling, (or what I like to simply call quid, pretending like I'm a south Londoner ordering a warm Fuller's on a Tuesday night). Not fair, they say. Whaaa.

THE FLY IN THE OINTMENT. Aberdeen Asset Management is the major agitator in this deal. I think they're called arbitrageurs. They watched the BBC on Brexit, they saw the pound drop, and they swooped in to rattle cages for a better deal. They bought a bunch of shares and say the revised deal "remains unacceptable….. We have engaged with SABMiller's board on the differential treatment of shareholders since the deal was first constructed. The way that the value of the partial share offer has diverged from the cash offer has compounded our discomfort," according to the NY Times.

But here's the deal: ABI really can't go higher, unless something macro happens. Here's why: Quoting Trevor Sterling from Bernstein: "As ABI have said to us, 'the cost synergies are not hanging on trees'; which means we may not see the same level of over-delivery on synergies that we have grown used to. Secondly, ABI is paying a very high price. With each disposal, the implied multiple has risen (now approx. 19.6x F16 EBITDA)."

THIS DEAL COULD FALL APART. While unlikely as it seems, given how much has been invested already by both sides, this deal ain't done. We've heard rumblings of a directive being circulated around SABMiller to stop integration work with ABI. If that's indeed true, there could be a lot more work to do, despite a glowing DOJ ruling, until this deal is Brooks N Done.

But one final note: SABMiller shares would plummet if this deal fell through, so both sides are motivated to see its consummation, even the activist investors (unless they got out early, which they probably would). As Stifel's Mark Swartzberg writes, both sides are playing a game of chicken.

Continues Mark: "We thus believe ABI has done enough shareholder intelligence work to believe that when all is said and done, it will own at a minimum 75%-85% of SAB shares, allowing it to consolidate and control SAB even if some visible shareholders oppose the deal."

The bottom line is both sides have too much to lose to let it fall apart, we believe.

Another final note: It's a bit ironic that the global uncontrollable macro-economic winds -- like the financial free-fall in 2008 which adjusted relative currencies to the point where InBev could afford to purchase Anheuser-Busch -- are again at work. But this time against ABI with the unforeseen Brexit vote.

The economic gods giveth, and the economic gods taketh away.

(If the deal goes through, more on what DOJ consent decree means to A-B distributors below).

UPDATE ON BALLAST POINT EXODUS: EARL TAKING 5 DAY SABBATICAL, THEN WHO KNOWS?

We got Ballast Point's just-departed CCO, Earl Kight, on the horn for five minutes yesterday, to see if we could get a little color on where he might end up next. And maybe suss out some motives for his departure from the brewery he helped build for almost 10 years, before Constellation bought it for $1 billion.
"I'll probably make some announcements in the next week or so," he said. "Right now I'm going to chill."

Earl told BBD he gave notice the first week of July. He'd planned to leave in August. The time frame "just accelerated a little."

As we speculated yesterday, it's hard to fit an entrepreneurial peg into a big company square. "I'm an entrepreneur," he explained. "I want to build stuff. And the transaction gives me the ability to do it. So I can continue to do what I like to do: Build teams and build brands. That's kind of the idea."

But before that, "I'll probably spend a little time working on my savage tan," he said.

DOES DEPARTURE HAVE ANYTHING TO DO WITH BALLAST POST-CONSTELLATION? Asked whether Constellation's handling of Ballast after the transaction contributed to this pivot, Earl answered, "I think the brand is getting bigger than me, and they're ... good at dealing with big brands," said Earl. Despite some rumors, "for the most part, they [Constellation] left me alone" after the transaction.

Earl has a history with mergers. He worked for R.J. Reynolds Tobacco company for more than a decade and a half. Then, "we merged with another company, [Brown & Williamson, the U.S. arm of British American Tobacco], and I left during that merger in 2004, 2003.

"It's just ... never the same [after an acquisition]. But, you know, they're [Constellation] going to kill it. I handed them the keys to a Ferrari. Let's go see 'em drive it."

"And our team is there. My team of folks are world class, so they're gonna kill it."

But back to Earl. Over the next few days, he's going to lay low: huck the ball with his dog, maybe spend some time with horses. "I'm gonna take like a 4-day sabbatical, maybe 5. I gotta get my oil changed," he said.

And then?

"I'll be around beverages of some sort," he hints. "I'll be around."

And will Ballast former president Jim Buechler join him in whatever imminent adventure?

"We'll probably end up together at some point; he might lie quieter for a little while longer," said Earl. "Guy works seven days a week. He's the only person I've ever met who works harder than I do. It's ridiculous. The level of work ethic is not human."

We can see it now: "Not Human Brewing Co." (That's a joke.) Stay tuned.

WHAT THE DOJ'S CONSENT DECREE MEANS FOR ABI DISTRIBUTORS

So assuming the deal does go through, industry consultant Andy Christon of Ippolito Christon & Co. interpreted the implications of the DOJ's recent Megabrew consent decree yesterday.

The decree "reshuffled the 'value cards' of every ABI distributor in the country," Andy believes. The conditions handed down "promote greater independence and marketability of beer distribution rights," and in turn increase the "value of distributorships and 3rd party brands."

As Andy sees it, this "re-shuffle will lead to stronger distributors" a plus for ABI in the long run, though there are "a few exceptions and cautions."

Regulators may have built a "30-foot wall" to keep ABI's hands tied, but the brewer will eventually whip out a "35-foot ladder" to preserve its position as market share leader, acquire more craft brewers, and "aggressively manage the transfer of ownership of ABI distributors." Andy and company foresee "a big squeeze coming over the next few years to anyone who gets in ABI's way - including distributors."

Distributors like Ben E. Keith who chose to distance itself from the VAIP program and bring on competing brands will see their "intrinsic market value" rise in the near term, Andy wrote. As these distributors will experience "less future coercion from ABI" and "improved marketability of 3rd party brands" to AB distributors in their expanded footprint.

Those that stayed true to ABI's wishes and followed through with the VAIP program will miss the perks of VAIP. But ABI still has the "ability to reward" those who pledged allegiance. The brewer can green light "strategic expansion opportunities" and "continue to exercise its right to 'Match and Redirect' territory acquisitions to distributors of its choice," wrote Andy. ABI will also continue to "amass and offer a formidable craft portfolio" for their distributors to compete.

The 10% branch volume cap is good news for distributors looking to expand as the chances of having to compete with ABI on a bid are greatly reduced. It's music to sellers' ears too, as restrictions on ABI entering the ring will likely keep their valuation high. But the cap is no bueno for at least one camp: "distributors counting on an ABI branch as its exit strategy."

However, don't rule out some "creative shuffling" from ABI "wherein a mega-distributor, an out-of-state distributor, or a non-traditional buyer such as an approved private equity investor will answer ABI's call … remember Byron Trott, J.R. Hand, and the Chicago branch deal? We think it's conceivable that ABI may even sell a branch operation into a deal to the right buyer, who simultaneously would acquire a contiguous, strategically located independent distributor - creating the two-step shuffle." In other words, de-facto branches where A-B still has a degree of control. Like we wrote yesterday, there are many ways to skin a cat.

With the 10% cap now firmly in place, ABI will have to get creative with future transactions. (They currently own 9%, according to the DOJ). That means the Coca-Cola route of "buying large chunks of its distribution system and re-franchising the territory to distributors of its choosing" is a no-go.

We'll have to discuss that for another day, because this issue is getting too long. But rest assured, I don't believe ABI is done in beverages. Count how many times the word "beer" is stressed in the DOJ consent decree. It's almost more than the word "the". That's limited to beer, everything else is game.

Until tomorrow, Harry

"For a while we pondered whether to take a vacation or get a divorce. We decided that a trip to Bermuda is over in two weeks, but a divorce is something you always have." - Woody Allen

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