Investors in Altria Group (MO 0.92%) tend to focus on the market for cigarettes and other tobacco products in assessing the company's past performance and future prospects. But for nearly a year now, Altria shareholders have looked more closely at the beer industry as an integral part of its long-term growth strategy. The tobacco giant's stake in SABMiller has given Altria a front-row seat in its proposed merger with Anheuser-Busch InBev (BUD 2.79%), and earlier today, the combination made a major step forward by gaining the approval of SABMiller shareholders -- a step that was by no means assured just hours before the vote.
In October 2015, Anheuser-Busch offered about $104 billion to buy SABMiller. The deal was structured so that most SABMiller shareholders would receive a straight cash payment for their stock. However, in order to prevent a massive capital gain and to continue Altria's exposure to the beer industry, Anheuser-Busch made special provisions to offer Altria a combination of cash and Anheuser-Busch's own stock for Altria's 27% stake in the other beer maker.
With such a large combination, regulators scrutinized the deal closely, requiring various strategic moves in order to eliminate anti-competitive concerns. For the most part, Anheuser-Busch and SABMiller were able to address those concerns by divesting some of their joint assets, with the most notable being the U.S. Department of Justice's demand that the post-merger company sell SABMiller's stake in MillerCoors. Over time, regulators eventually fell in line, with the Justice Department signing off in July, and other countries following suit.
How a currency in crisis affected a beer deal
However, the last hurdle was to convince SABMiller shareholders to approve the deal. A couple of things made a positive result less than certain. First, the U.K.'s Brexit vote to leave the European Union led to a dramatic decline in the value of the British pound. Because the cash payment was denominated in pounds, many investors felt as though the offer no longer represented fair value for SABMiller. Anheuser-Busch responded by boosting the cash offer by a single pound, to 45 British pounds, largely making up the decline in the U.S. dollar value of the merger that resulted from the Brexit vote.
Even with that higher offer, some major institutional shareholders balked at the deal. Aberdeen Asset Management said that they believed that the deal as proposed doesn't value SABMiller highly enough, and reports suggested that other institutions such as Vontobel and Ash Park Capital were also considering a no vote. That wouldn't have been as important of a consideration were it not for the fact that SABMiller had agreed to exclude the shares that Altria and another major shareholder own from the vote. As a result, SABMiller had to get supermajority approval from its remaining shareholders
Getting to yes
In the end, SABMiller shareholders overwhelmingly voted to approve the deal. The final tally included more than 95% of votes in favor of the sale, climbing above the required 75% level. Anheuser-Busch therefore avoided having to make some form of sweetened offer in order to satisfy dissenting shareholders.
After the vote, Anheuser-Busch now believes that it has cleared the final hurdle in getting the deal done, and it plans to close on the transaction in early October. For Altria, that will mean converting its SABMiller position into a roughly 10% stake in Anheuser-Busch, along with receiving about $3 billion in cash. The cash could potentially allow Altria to consider tender offers to buy back some of its outstanding bonds, reducing debt, and shoring up the company's balance sheet. Stock buybacks or a special dividend might also be an option.
Yet going forward, the more important aspect of the deal for Altria will be how Anheuser-Busch contributes to its overall success. Although tobacco will remain the primary focus for Altria for the foreseeable future, having its stake in the Budweiser maker will add a different dimension for Altria shareholders that could add to the tobacco stock's long-term returns.