Brexit's Ripple Effect Threatens AB InBev-Miller Merger

The proposed marriage between Anheuser-Busch InBev and SABMiller is off to a rocky start as the deal's value fell following the U.K.'s vote to leave the EU. Image source: Anheuser-Busch InBev.

So much for sewing up this megamerger package with a tidy bow. After the $106 billion buyout of SABMiller (NASDAQOTH: SBMRY) by Anheuser-Busch InBev (BUD 0.96%) only just gained approval of U.S. antitrust regulators, the entire deal has been thrown into doubt because of the devaluation of the British pound by the U.K.'s Brexit vote.

The great unraveling

Since formally making a takeover offer last November, A-B InBev and Miller have hopscotched the globe in support of the deal and agreeing to shed some of Miller's most important assets to allay regulator fears.

In China, Anheuser-Busch agreed to sell Miller's investment in the the country's largest brewer, CR Snow, for $1.6 billion (it just got antitrust approval there). In Europe, it pledged to purge from its portfolio Miller's ownership of Peroni and Grolsch. And in the U.S., it said it would shed Miller's half of the MillerCoors joint venture with Molson Coors (TAP 0.54%) for $12 billion.

It was just last week that the Department of Justice signed off on the acquisition, though it included some additional stipulations that likely meant A-B's purchase of Miller was the last acquisition it would make.

Yet in between the time of the original offer and getting the approvals it needed, the U.K. took a historic vote for independence and chose to leave the European Union, a plebiscite that shook to the core the foundations of continental unity. While the fallout from the Brexit vote is still rippling outwards -- for example, Lloyds Banking Group just announced it was laying off 3,000 workers and closing 200 banks because of it -- arguably one of the least expected developments was the possible collapse of the Anheuser-Busch/Miller merger.

Some are more equal than others

In the wake of Brexit, the value of the U.K.'s pound has fallen precipitously. The merger that had been priced at $106 billion, 70 pounds per share, fell to around $100 billion, a valuation that a number of investors no longer saw as adequate.

Reuters reported private equity firm Aberdeen Asset Management, which owns just over 1% of Miller stock, said that especially due to the original merger agreement creating two classes of investors, one treated better than the other, the new, devalued purchase price was no longer acceptable.

As part of its globetrotting negotiations to get everyone on board, Anheuser-Busch agreed to a special sweetener for tobacco giant Altria (MO 0.49%) and the Colombian Santo Domingo family business BevCo that together control about 40% of Miller's stock. Without them supporting the merger, it wouldn't happen, and because their investment has been lucrative -- it received $757 million in dividend payouts in 2015 and had received $1 billion worth the year before -- they were seen as needing an extra incentive.

In the side deal it made with the two, rather than the all-cash offer other shareholders were getting, Anheuser-Busch agreed to exchange each Miller share they owned for 0.483969 shares of A-B, shares that would be unlisted. Although the carrot extended to them brought them onboard, it angered others because of the disparate treatment. Now in the wake of the purchase price getting discounted, A-B faces the prospect of a tough shareholder vote on the deal.

Penny wise, pound foolish

In a move that surprised everyone, Miller included, Anheuser-Busch agreed to raise its purchase price from 44 pounds to 45 pounds per share. While that put the deal's valuation at around $104 billion, or 79 pounds per share, it was seen by many as enough to mollify the deal's critics. Except for the fact that A-B said the new price was its "final offer," which under U.K. merger laws meant the purchase price could no longer be increased, and because A-B made this offer unilaterally without consulting Miller, the latter was caught at unawares.

It also turned out it did little to ease criticism of the unequal treatment of investors, and Miller announced it was immediately suspending all integration work it had been performing in anticipation of the deal's approval.

Since early this year, Miller has been integrating its finance, technology, procurement, and other functions into those of Anheuser-Busch, but in the wake of the surprise offer, all that has come to a screeching halt until the proposal can be reviewed.

Of course, many analysts say Miller is only being prudent because it has a fiduciary responsibility to its shareholders and the deal will likely still go through, but others think there is enough doubt because Anheuser-Busch chose to set in stone what it was willing to pay, an amount that may not satisfy all the deal's critics.

What had once looked like a smooth road to creating a global brewer that controlled almost one-third of the world's beer, has instead become a pothole-filled highway that could see the merger go as flat as day-old beer.