#megabrew

Analysts at Stifel Financial Advisers said they see the latest developments as a "symptom of fiduciary duty" and say it's "very unlikely" that AB InBev upped its offer by less than what it thinks is needed to achieve the 75% acceptance threshold.

By Renee Cordes

Is Anheuser-Busch InBev NV/SA’s (BUD) 'megabrew' deal for SABMiller plc in danger of unraveling?

That's what some fear after SABMiller pressed the pause button with a board decision still pending on a higher offer from its Belgium-based suitor this week. Bowing to pressure from activist investors, AB InBev raised the tab to £79 billion ($103.98 billion) from £73 billion agreed last November.

AB InBev, which makes Budweiser, Stella Artois and Becks, has said that the new offer was final. That offer, prompted by pressure from activist investors amid the falling British currency, was immediately rejected by one of the target's main shareholders, Aberdeen Asset Management plc. The fund manager on Tuesday called the latest offer "unacceptable as it both undervalues the company and continues to favor SABMiller's two key shareholders."

More turbulence has emerged in the last 24 hours, with SABMiller CEO Alan Clark reportedly telling employees in a company memo that all convergence planning is on hold, and all contact between the companies should be put off until further notice.

"I appreciate this will cause lots of internal and external speculation," Clark is quoted as writing. "However, please stay focused, and I will update you as soon as I am able to."

A spokesman for SABMiller declined to comment.

A spokeswoman for AB InBev said via email that the company has no comment on the press reports.

AB InBev shares were down 2.61% in Brussels Thursday at €110.15, giving it a one-year return of 1.37% and a current market value of around €181.9 billion.

SABMiller shares slid 2.10% in London to £92.00. The stock is up 31.12% over a year ago, and its market cap is now at £71.08 billion.

As is often the case with cross-border M&A deals, SABMiller and AB InBev had started convergence planning several months ago -- during which no commercial information is shared -- to ensure a smooth transition from day one.

Analysts at Stifel Financial Advisers said in a note they don't see the latest developments "as a sign SAB is considering changing its recommendation of the transaction," but rather as a "symptom of fiduciary duty" and says it's "very unlikely" that AB InBev upped its offer by less than what it thinks is needed to achieve the 75% acceptance threshold.

In a separate note, Redburn (Europe) Ltd. equity analysts argue that it serves the SABMiller board to wait before deciding its next move, since China has yet to give the green light for the deal with AB InBev, and the Belgian company is due to report results on Friday.

Noises about the deal turbulence come just as it appeared to be nearing the finish line, after clearing conditional approval from the U.S. Department of Justice last week to keep a second-half planned closing on track.

A deal failure would be a rare personal defeat for AB InBev CEO Carlos Brito, the beer industry's de facto dealmaker-in-chief who runs the Leuven, Belgium-based company from New York City. He's perhaps best known for leading InBev NV/SA's $52 billion takeover of St. Louis-based Anheuser-Busch Cos. to create the world-leading AB InBev in November 2008, and repeatedly refers to the agreed SABMiller tie-up as the world's "truly global brewer."

SABMiller has yet to formally respond to AB InBev's revised offer, and the SABMiller declined to say when its board will meet.

On Tuesday it said that its board will continue to consult with shareholders and meet formally to review it. It also disclosed that it had hired Centerview Partners as an additional financial adviser. The existing roster includes Robey Warshaw LLP, JP Morgan Cazenove Ltd., Morgan Stanley and Goldman Sachs & Co.

AB InBev's financial advisers are Lazard Ltd., Deutsche Bank AG, Barclays Capital, BNP Paribas SA, Bank of America Merrill Lynch, and, on Africa matters, Standard Bank plc.

AB InBev is due to put out second-quarter results this Friday before markets open. Analyst Wim Hoste of KBC Securities expects net profit to decline by 59% to $791 million, mainly due to financial costs related to financing arrangements for the SABMiller deal as well as adjustments on pound hedges also related to the acquisition.

If it succeeds, the Budweiser maker's $108 billion purchase of SABMiller will be the largest food and beverages sector M&A transaction ever.

by Renee Cordes

He'd like to sell the world a Bud, so he's buying SABMiller plc.

That's how AB InBev SA's (BUD) CEO Carlos Brito explained the rationale behind the Budweiser maker's £71 billion ($107.5 billion) purchase of its U.K. peer, which sets an all-time record for food and beverages sector M&A, according to Dealogic Ltd.

"The combination of AB InBev and SABMiller will allow us to bring more choices to consumers around the world and bring some of America's most iconic brands to markets they have not yet reached," he told U.S. lawmakers at a recent public hearing. "We look forward to the day when American travelers can find a cold Budweiser almost anywhere in the world."

Just to show how serious he was, Brito traded in his regular denim-and-button-down get-up for a suit and tie, as he repeatedly insisted that the transaction will have no impact in the U.S. His sales pitch didn't fly with everyone, nor deflect questions about the harm the deal could wreak on distribution, small independent brewers or on prices for consumers.

The scale of the transaction explains the concerns. A fusion of the world's top two brewers would create an entity, dubbed Megabrew, with about 400 brands, a market value of around $276 billion, and about half the beer's profit pool. The combo would also rank among the top five consumer goods companies.

The deal came together after the Leuven, Belgium buyer turned an initially hostile situation into a friendly offer, as it did with St Louis, Mo.-based Anheuser-Busch Cos. in 2008.

After a two-month pursuit AB InBev won its target's board over in November with a sweetened bid and a pledge to cough up $3 billion if the deal is quashed either by its own shareholders or by regulators. The 4,400-pence-a-share cash offer is 50% above SABMiller's undisturbed share price, while the target's two top shareholders, tobacco maker Altria Group Inc. (MO) and the Santo Domingo family's Bevco Co. Ltd., which together own 41.6%, were offered a partial share alternative.

But the November takeover agreement was costly for an executive notorious for his frugality.

"It's certainly at the pricey end of the major deals they've done," said Sanford C. Bernstein's Trevor Stirling. The analyst predicts it will take AB InBev at least six to eight years to recover its cost of capital for SABMiller, compared with two years for predecessor InBev SA/NV's $52 billion purchase of Anheuser-Busch in 2008 and three years for the renamed AB InBev's $20.1 billion purchase of Corona maker Grupo Modelo in 2012.

"These guys are experienced deal executors and it's highly likely they will get a return over time, but the time to get it to achieve an economic return, if you look at the cost of capital, is slower," Stirling added.

The price implies a multiple of 15.6 times enterprise value to Ebitda for the last 12 months before planned disposals, rising to a multiple of 16.4 after disposals, according to Stirling's calculations. That places it among the five most expensive beer deals ever, just behind Heineken NV's 2012 takeover of Tiger beer maker Asia Pacific Breweries Ltd., now called Heineken Asia Pacific.

To pay for SABMiller, AB InBev lined up $75 billion in senior loans, arranged within the space of a few weeks by Banco Santander SA, Bank of America Corp., Bank of Tokyo-Mitsubishi UFJ Ltd., Barclays plc, BNP Paribas SA and Deutsche Bank AG. Allen & Overy LLP partner Nicholas Clark, who advised the lenders, said the loan is the "largest commercial loan in the history of global loan markets, far surpassing pre-crisis value," while Freeman & Co. estimates the arrangement fees alone at $209 million.

Freeman also predicts a $235 million bill for M&A bank advisory fees - not including legal, consultancy, or public relations charges. That's the second-highest ever for a cross-border deal and the highest-ever in the consumer and retail industries. AB InBev's lead financial adviser is Lazard, while SABMiller tapped Robey Warshaw LLP, a boutique firm in West London's high-rent Mayfair district that's also advising Royal Dutch Shell plc on its £47 billion takeover of BG Group plc.

By comparison, AB InBev's $1.4 billion in promised synergies looks small, even coming on top of $1.05 billion in cost cuts touted by SABMiller when it was still resisting its suitor.

As well as valuation question marks, the deal carries antitrust risks.

With the November agreement, AB InBev attempted to tackle arguably the most pressing competition issue head on.

It struck a a related deal to sell SABMiller's stake in Chicago-based MillerCoors LLC to co-owner Molson Coors Brewing Co. (TAP) A bit later, it put SABMiller's premium European brands including Peroni and Grolsch on the auction block, though analysts predict a difficult time finding buyers for Grolsch. Analyst Hans d'Haese of Bank Degroof in Brussels also expects AB InBev to put smaller SABMiller brands - in Belgium, Germany, the U.K., Luxembourg and eastern Europe - up for sale, which he said would also help the buyer defray some of the costs of the deal.

But some observers say Britos' talk of his "pro-active" approach to antitrust issues smacks of over-confidence.

"There are two big challenges remaining: One on the regulatory side, and one on the bottling partnerships," said Richard Withagen, an analyst with SNS Securities in Amsterdam.

On the antitrust front, the deal is sure to get a thorough going-over in Washington, Brussels and China, and possibly also South Africa. In China, SABMiller's owns 49% of the country's leading brewer, China Resources Snow Breweries Ltd., a joint venture with state-owned China Resources Enterprise Ltd.

There may also be conflicts of interests between SABMiller's bottling alliance with Coca-Cola Co. (KO) in Africa, and AB InBev's bottling arrangement with PepsiCo Inc. (PEP) in Latin America. Some expect AB InBev to eventually plot a takeover of either Pepsi or Coke.