AB InBev/SAB Miller and Dell/EMC: Is This the Top?

AB InBev and Dell's proposed mega-transactions point to an excess of credit and animal spirits.

Alex Dumortier
Alex Dumortier, CFA
Oct 12, 2015 at 12:34PM

Dell chief executive officer Michael S. Dell. Image source: Charlier Brewer, republished under CC BY-SA 2.0.

It's merger Monday, and a significant one at that!

First, Brazilian brewer AB InBev raised its offer for its rival SAB Miller for the third time to 43.50 pounds per share, conditional on SAB's two largest shareholders, Altria and Columbia's Santo Domingo family, selecting the cash-and-share offer (the option of an all-cash offer is also available to other shareholders). The deal, which values SAB Miller's equity at 70 billion pounds ($107 billion), would garner all kinds of accolades:

  • The largest deal of 2015 and the fourth-largest deal in history.
  • The largest consumer sector transaction in history.
  • The deal would create the world's largest brewer. A research company estimates a combined market share after likely divestitures of 29%, 20 points ahead of its nearest rival, Heinken.

As this column pointed out last week, the Brazilians behind this deal are very thirsty. AB InBev's CEO Carlos Brito said last week's offer of 42.15 pounds per SAB Miller was "an amazing price," which raises the question of how he justifies raising it once more. The new offer represents a 48% premium over the "undisturbed" price at closing on Sept. 14.

Given their track record, it seems unwise to second guess the trio of Brazilian investors behind AB InBev's extraordinary rise (investment bank Goldman Sachs called the company the "supreme acquirer").

Still, one can't help but wonder if a burning ambition to create a global "megabrewer" is finally pushing them to pay a price on which even they will struggle to earn a decent return.

One of the keys in reconciling this apparent conundrum lies in the structure of the cash-and-share offer, which appears to be less attractive than the all-share offer.

As this column wrote last week, expect this deal to be completed. If it isn't, it is SAB Miller's shareholders who will have serious reason to question the judgement of their board of directors.

In what could be another landmark deal, Dell announced it has signed an agreement to acquire EMC Corporation in a cash-and-share offer worth $33.15 per share for a total transaction value of approximately $67 billion. That figure would be enough to put the deal at the top of the all-time ranking of technology M&A transactions.

Here again, another key to understand the price being paid is the structure of the offer, which is split between $24.05 per share in cash and a tracking stock linked to the performance of EMC subsidiary VMware (its most valuable asset).

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With both of these transactions, 2015 is easily on track to be the largest ever in terms of global M&A volume, surpassing 2007 -- the peak year of the credit bubble. That's an uncomfortable comparison, as it raises the question of whether, in combating the impact of the credit crisis, central banks' extraordinary monetary policy measures (including zero policy interest rates) haven't stoked another credit bubble.

Dell co-owner, Silver Lake Partners, completed its acquisition of SunGard Data Systems in 2005 in what was then the largest technology buyout in history. That deal has not been a success. Silver Lake, one of the parties to the EMC acquisition, will be hoping this deal turns out differently.

One thing is certain: The equity market, which would ordinarily greet mega-mergers with optimism, does not appear to have given today's news its benediction. The Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) are up 0.25% and 0.5%, respectively, at 12:25 p.m. EDT.