Patel could yet stick his foot in AB InBev deal
WITH just five working days to the deadline for the Competition Commission to complete its investigation into the proposed $108-billion (about R1.7-trillion) acquisition of SABMiller by Anheuser-Busch InBev, there is still no indication whether Economic Development Minister Ebrahim Patel will intervene.
Patel is not the only threat to the April 5 deadline, but is possibly the most significant.
The minister not only has a right to intervene in the proceedings before the competition authorities, he has an obligation if he believes there are public interest issues that must be safeguarded.
While this is a worthy-sounding obligation, Patel has too often interpreted his brief in terms described by former Competition Tribunal chairman David Lewis as “lobbying and horse-trading behind closed doors”.
In his book, Thieves at the Dinner Table , Lewis describes Patel’s involvement in the high-profile acquisition of Massmart by Walmart: “Not only did the minister intervene extremely late in the investigatory process but he chose to intervene not by making submissions to the commission’s investigators, as he is entitled to do, but rather by entering into private negotiations with the merging firms.”
(Patel’s office did not respond to attempts to get comment on the matter.)
This style of engagement must be sending chills down the spines of AB InBev executives, who have given themselves a deadline in the second half of 2016 to complete this complex merger.
There are many compelling reasons why AB InBev wants a speedy completion: uncertainty during a protracted merger process can cause “business drift”; it is notching up quarterly interest payments of around $460-million on the $60-billion debt it raised a few months ago to fund the deal; and, if completed before earlyAugust, AB InBev would be in line to receive the SABMiller dividend (around $1.5-billion) that would otherwise be paid to SABMiller shareholders.
An additional reason is that acquisition-driven AB InBev prides itself on beating its own forecasts, whether related to deal timetables or cost-cutting.
That AB InBev has given itself such a tight deadline should be of no concern to South African regulators and should not distract them from doing a thorough job and extracting whatever they can to address any public interest concerns.
In the past, Patel’s “lobbying and horse-trading” have frequently resulted in the merging parties agreeing to finance some form of multimillion-rand fund, which is generally a positive development. But the manner in which this was secured presents a considerable risk to the independence and credibility of the competition authorities, which number among the very few excellent post-1994 regulatory bodies.
This time around the merging parties have done a lot of the negotiating with various government entities as well as the Public Investment Corporation early on. The departments of trade and industry, and agriculture, forestry and fisheries (Patel’s allies in previous rounds of horsetrading) are believed to be happy with the merging parties’ commitments. These include boosting local agriculture, a secondary listing on the JSE (already done), a develop- ment fund for small-scale suppliers (estimated to be R1-billion) and an undertaking on job cuts. So, it’s likely the two ministers would not support any last-minute moves by Patel.
Similarly, the strong relationship between Patel and the South African Commercial, Catering and Allied Workers Union, the affected union in the Walmart case, is unlikely to be replicated this time.
Katishi Masemola, general secretary of the Food and Allied Workers’ Union, knows his way around the competition authorities and how best to secure protection for his members. He will not need to align himself with Patel. All of which supports the growing view that Patel might be discouraged from taking too aggressive a stance this time.
However, to the extent that Masemola is unable to secure reasonable commitments from the merging parties, his union could threaten the deadline. It is the only party that would conceivably appeal against the Competition Tribunal’s decision (the minister has no right of appeal). An appeal against the tribunal would likely push out the com- pletion date to the last quarter.
Masemola faces a difficult situation. The merging parties have made much of the desire to protect SAB’s special position in South Africa and say they see no need for job cuts here. But AB InBev comes with a reputation; the earningsenhancing cost-cutting that has made it a favourite with investors gives Masemola cause for concern. He understands that the business needs flexibility and cannot give cast-iron guarantees, but he needs some assurances about the quantity and quality of jobs at the merged entity.
Events in the wake of the Kraft-Cadbury merger in 2010 will have added to Masemola’s apprehension. Despite undertakings, about 30% of employees in South Africa were retrenched within six months of that deal. (Kraft also backtracked on employment promises in the UK within weeks of the deal. Such was the outcry that the UK quickly introduced rules governing acquisitions by foreign firms.)
Similarly, PepsiCo’s purchase of the minorities in Simba in 1999 was followed by a rapid deterioration in employment terms as the shop stewards’ office was closed down, benefits rolled back and jobs redefined.
Masemola is fearful of a recurrence of these events and that the competition authorities do not have the capacity to enforce commitments made by powerful multinationals.
While AB InBev’s South African commitments (a JSE listing and a development fund) seem generous, they are not out of line with what it has done in other jurisdictions to ensure a deal is approved.
In the US, it is selling off SABMiller’s stake in MillerCoors to avoid difficulties with the department of justice. AB InBev CEO Carlos Brito was called to give evidence at a congressional hearing in December last year. The US justice department has initiated a “second request” review, which analysts say may be linked to distribution concerns and is likely to be open-ended.
In China, AB InBev had little choice but to sell SABMiller’s 49% stake in China Resources Beer, which owns Snow beer, to statebacked China Resources Enterprises, which owns the other 51%. The $1.6-billion tag on the deal was short of what the market had expected.
In Europe, AB InBev has announced a conditional transaction to sell Peroni, Grolsch and Meantime “in order to front-run any potential anti-trust concerns”, said an analyst.
So while a July completion date remains doable, it is far from being guaranteed.