SABMiller's (NASDAQOTH: SBMRY) board of directors may have approved Anheuser-Busch InBev's ( BUD -0.60% ) surprise higher offer for the company, but that doesn't mean the risk of the merger not going through has completely dissipated. There are still a number of shareholders unhappy with the terms of the deal between the Europe-based companies, and a concession Miller granted increases the likelihood they could succeed in blocking it.
While the megabrewer deal had been on the fast track to completion, particularly after the U.S. Justice Department gave it a stamp of approval, albeit one with conditions, the vote by the U.K. to leave the European Union sent out ripples that looked to swamp the deal. The value of the British pound tumbled in the wake of the Brexit vote, and an AB-Miller merger that had once been priced at around $106 billion was suddenly worth about $100 billion. Investors who were already upset about the unequal treatment they were receiving compared to two major shareholders were no longer keen on seeing the deal completed.
Even Miller's board of directors was concerned about the valuation of the deal, and reportedly expressed as much to Anheuser-Busch, which quickly turned around and raised its offer from 44 pounds per share to 45 pounds, about a $2 billion increase.
While many analysts saw the higher offer as enough money to appease most deal critics, A-B threw a wrench into the works by calling it its best and final offer, a term which under U.K. merger laws would prohibit any additional increases in the bid.
That surprised even Miller, which immediately called a halt to the integration work it was doing in preparation for merging with Anheuser-Busch. Some shareholders, like private equity firm Aberdeen Asset Management, said the new offer was still too low, and Miller's board didn't necessarily disagree. But the board felt that considering all the time, effort, and money it had already invested in the merger, the increased value of the bid was just over the threshold of acceptability, and it voted to approve it. Both Miller and Anheuser-Busch have since said they expect the deal to close by Oct. 10.
However, Miller added a wrinkle. Acknowledging the difficulty of the decision, because the terms and conditions of the offer have changed so much since the original offer was made, Miller also intends to ask U.K. regulators to treat its two largest shareholders as a separate class of investor. That would allow the rest of Miller's shareholders to vote on the deal separately, lowering the threshold of total shares needed to reject the offer.
Together, tobacco giant Altria ( MO 0.35% ) and Colombian brewer and bottler BevCo control about 40% of Miller's stock. Because owning Miller shares has been quite lucrative for them, to get them to agree to the merger, they were given an incentive unavailable to the rest of Miller's investors. Where common shareholders are getting an all-cash deal, Altria and BevCo are also receiving a partial share alternative. It will grant them 0.483969 restricted shares in A-B (shares that won't trade), as well as 4.6588 pounds in cash for each Miller share they own. That was the disparate treatment that upset investors like Aberdeen.
Treating Altria and BevCo as a separate class of shareholder would reduce the percentage threshold needed to block the merger from 25% of all votes to just 15%. Considering investors like Aberdeen only own about 1% of Miller stock, the 15% mark is still a high hurdle to get over, but it puts the potential for a shareholder revolt within the realm of possibility.
Common shareholders aren't getting the amount of money they thought they were when the merger was first agreed to, and they won't be getting shares in Anheuser-Busch as Altria and BevCo are. The odds are the merger will pass, but as with everything that Brexit has touched, the chance for an upset remains in place.