Investors woke up yesterday morning to some surprising news. Mega-beer brewer AB InBev (BUD -0.39%) had raised its offer to buy SAB Miller (NASDAQOTH: SBMRY) yet again. But wait a minute: Wasn't this merger a done deal at the previously arranged price? Hadn't they haggled in late 2015, for months, on terms to combine these two giants and join forces to dominate the beer industry, particularly in emerging markets? Didn't the final offer more than fairly compensate SAB Miller shareholders for their company, valuing it at a more-than-fair 25x forward EPS estimates -- certainly a rich price for a mature company?
Source: Getty Images.
All of this is true. But as often happens with cross-border combinations, the devil is in the currency.
International operations, local currency
One might think that huge multinational companies such as SAB Miller and AB InBev are immune to individual currency moves. After all, SAB Miller, while domiciled in England and registered on the London Stock Exchange, has operations in dozens of countries spread across 6 continents. However, when it comes to denominating the company's shares, SAB Miller is valued in its local currency – the British Pound. In case you haven't noticed, something interesting has happened to the value of Pound Sterling recently.
Euro to Pound Sterling Exchange Rate data by YCharts
Needless to say, the pound is looking a little less, well, sterling these days. While it had slowly lost some of its value over the past year, the big move which sent the pound to a staggering 31-year low, took place the day England's citizens voted to leave the European Union, otherwise known as the "Brexit."
A currency move of even a few percentage points in a given year is the norm, so for a euro (the currency AB InBev's operations and share price happen to be denominated in) to go from costing British citizens 0.72 pounds to 0.84 pounds -- over a 14% "loss" for those that live under the Union Jack -- it's a big deal.
For multinational companies based in the UK, which generate most of their income overseas, the move has a positive: Their revenues are coming in the form of appreciating currencies that can then be repatriated back home into even more pounds than before.
Unfortunately for SAB Miller shareholders, AB InBev's buyout offer stood (at least until today) at exactly 44 Pounds. The value of said pounds notwithstanding.
Why isn't a deal a deal?
AB InBev's management could have easily said "a deal is a deal" and stayed pat. However, there are two strong reasons why it made the decision to raise its price to 45 Pounds in cash. The first is because it costs them little to head off any potential objections in light of the Pounds drop by raising the per pound buyout price. After all, most of AB InBev's cash is in the form of Euros and Dollars, both of which have appreciated against the Pound smartly.
The second, and partly related, is that there are already minor rumblings among the ranks of SAB Miller shareholders that the deal now needs to be renegotiated. As detailed by Bloomberg, major shareholders Altria Group Inc. and Bevco Limited have been placated by the increase, while other institutions such as Elliott Management and Davidson Kempner Capital Management have begun to raise objections in light of the Pounds' huge move. Fortunately for those that want the deal completed post haste, the parties that are raising modest objections are not major shareholders (Davidson Kempner, for example, owns just 20,000 shares according to S&P Global Market Intelligence).
Better to be generous when it costs little, than to be stingy and risk the termination of what amounts to a hugely important acquisition.
Pounding the table for completion
AB InBev wants this merger completed, badly. As I detailed recently, the combination of AB InBev and SAB Miller, even after sizable divestitures, will be perfectly positioned for the future. It will have major footholds in North America, China, and Europe, and -- as icing on the cake -- will be near monopolistic in its control over much of the emerging markets in Africa and South America. The road has been long, but the biggest obstacle to consummating the acquisition, the U.S. antitrust authorities at the Justice Department, has been surmounted. There's no sense in BUD's management fowling up its crowning strategic move over a few, well, Pounds.
