Thursday, October 15, 2015

AB InBev and SABMiller: Negotiating the Deal

Negotiating the deal is crucial to bidder success and target shareholder welfare.  From the bidder’s side, increasing the bid premium reduces the ultimate rate of return on investment, but paying a premium too low could result in a failed offer.  Target shareholders generally want the maximum price they can obtain, but other factors also come into play including timing of the deal, ownership after the deal, seats on the combined firm board, etc.

Both sides are concerned about deal structure and we’ve said many times that it is important to bargain on many fronts.  In addition to the bid premium we must consider form of payment, structure of the deal, timing, taxation, residual ownership, warranties and representations, employee and stakeholder welfare, regulatory concerns and numerous other factors. 

The maximum price a bidding firm should pay is the estimated net present value of the target under their control.  But paying this amount produces a NPV of zero, with no room for error.  The minimum price a public target will accept is generally the pre-offer market price.  Where the final deal settles in this range is determined by the relative bargaining power of the two sides.  Numerous factors go into bargaining power including ownership structure (concentrated or dispersed, toeholds owned by the bidding firm, the percentage of shares controlled by management, etc). 

Bargaining power is also impacted by how important the deal is to each side and this is related to the alternatives available to bidder and target. Is this bidder the only firm that can purchase this target?  Advantage – Bidder. 

Are many bidders vying for the target?  Are obvious synergies available to many parties?  Advantage target..  Is the target management really anxious to cash out?  Is the timing of the deal crucial to the bidder, etc.

There is considerable empirical evidence on negotiating tactics and shareholder welfare.  An overriding finding is that target shareholder value is maximized by management that forcefully negotiates, but does not ultimately block the deal.

A good illustration of these elements is the AB InBev acquisition of SABMiller.  According to the Wall Street Journal, both sides stood to gain from the deal but SABMiller’s chairman was convinced that AB InBev wanted the deal more.  His resistance and negotiation led to a sweetened offer – a 50% premium over the pre-offer (and rumor) market price and a $3 billion breakup fee if the deal doesn’t go through.  Other aspects of the deal including the social terms (who stays on the board, the name of the combined firm, etc.  are yet to be disclosed.  Also unclear is the degree to which regulatory authorities will oppose the deal or force concessions. 

SABMiller’s ability to negotiate these terms is even more interesting given that Altria Group, Inc which owns about 27% of the target signaled they would back a lower bid.  But SAB’s chairman Jan du Plessis was also active in courting large shareholders, getting Colombia’s Santo Domingo family on his side.  The family controls about 14% of the company and is the second largest shareholder.

The skill of SAB’s chairman, comes in part, from experience.  According to the WSJ he was chairman of Rio Tino PLC when it fended off a takeover bid from Glencore PLC. 

All the best,


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