SABMiller deal not quite sewn up ahead of vote

Anheuser-Busch InBev will be relying on hedge funds to push the takeover through, writes Ann Crotty

JUST a week away from the SABMiller shareholder vote on Anheuser-Busch InBev’s (AB InBev’s) offer and, after all AB InBev’s hard slog and promises, it’s difficult to imagine that the deal will not go through.

Difficult but not impossible. In a year in which global currency markets, equity markets and even the AB InBev offer for SABMiller were dealt an almighty blow from the unexpected outcome of the Brexit vote, few commentators are prepared to say this is a done deal until the votes are counted on September 28.

In theory, if all the South African-based SABMiller shareholders decided in one jingoistic gesture to vote as a bloc to prevent the disappearance of a local icon, they could stop the deal. According to the SABMiller share register, at end-August 13.8% of the company is held in SA. (The US holds 24.8%, England 24.7%, and Europe 21%.)

If 100% of the 59% of SABMiller shareholders entitled to vote do vote, this 13.8%, combined with the 2.26% shareholders that have indicated they will vote against the deal, would be sufficient to block the transaction. Crucial to the outcome of next week’s vote is likely to be the behaviour of hedge funds that have built up an exposure in SABMiller of as much as 20% in the months since the deal was first announced. Most hedge funds hold their positions through derivatives rather than shares, which means they are unable to vote. If they want to vote, and if the vote looks close they will want to vote, they will have to pay the stamp duty to convert their derivatives to physical shares.

As you’d expect, analysts have interrogated the possible outcomes from every perspective, looking for some hint as to how the vote will go.

In one scenario, no doubt a chilling one for AB InBev, as few as 7.5% of the SABMiller shareholders could block this deal if none of the hedge funds vote. This is made more chilling by the 2.26% considered very likely to vote against the transaction.

This stake includes the 1.2% of SABMiller held by Aberdeen Asset Management, which has publicly opposed the transaction because of the low takeover premium being offered compared with the standalone value of SABMiller.

A number of factors have made the outcome of the vote a little more uncertain than the AB InBev team would probably like at this stage of the game.

First is the undertaking given to the UK High Court by SABMiller’s two largest shareholders, Altria and Bevco, that they will be bound by the outcome of the scheme vote, although they will not be voting on it. Second is the 20% of the SABMiller shares held by hedge funds. A third major factor is that the transaction needs to be approved by 75% of the shares attending the meeting, either by proxy or in person, on September 28.

Removing Altria and Bevco from the vote means only 59% of the shares can vote. On this basis a 25% blocking vote would be equivalent to about 15% of the total shares.

That’s if 100% of the remaining shareholders attended the meeting. Realistically, the turnout at the meeting is likely to be closer to 90% than 100%.

And so whether the deal goes through or not is likely to depend on what the hedge funds do.

Hedge funds will be reluctant to pay to get voting rights because it shaves the returns they are set to earn on their investment in the transaction. But there will be no returns for them unless the transaction is approved.

There’s also the possibility the disclosed holders of the shares underlying the hedge funds’ derivative positions (usually banks) will carry the vote for them.

All of which takes the transaction into game theory territory, which is never far away in the world of investments.